Should Social Security’s Cost-of-Living Adjustment Be Changed?

Some recent deficit reduction proposals call for shifting to a chained CPI to determine the cost of living adjustment (COLA) for Social Security. Others call for using a special price index for the elderly to adjust benefits.  This fact sheet examines the consequences of each change on beneficiaries’ incomes, program costs, and the economic security of older Americans.

Social Security becomes increasingly important at advanced ages as pensions are eroded by inflation, employment options end, spouses cope with widowhood, and savings are depleted. As Social Security makes up an ever greater share of elders’ income, even minor erosions of the real value of their benefits are a public policy concern. Moreover, as seniors age, out-of-pocket health spending takes a growing bite out of their Social Security benefits. Elders do not appear to be overcompensated for inflation as they grow older.

The consumer price index (CPI) that is now used to determine Social Security COLAs (called the CPI-W) undercompensates beneficiaries for increases in their living costs to the extent that it does not fully reflect their out-of-pocket health care expenses. To shift to the chained CPI-U would appear to undercompensate them even further by lowering COLAs based on empirically unproven assumptions about the ability of the elderly and the disabled to maintain their standard of living by changing what they buy in response to inflation. Click here to read more.