- The COLA is part of Social Security's basic benefit. It is NOT a benefit increase. The COLA is designed to make sure that Social Security's modest but vital benefits do not erode over time. Without these annual adjustments, the benefits would slowly but inexorably lose their purchasing power. Without it, the longer one lived, the less purchasing power her or his benefits would have.
- With the support of the overwhelming majority of Democratic and Republican members of the House and Senate, President Richard Nixon signed the COLA into law on July 1, 1972 saying that this "action constitutes a major break-through for older Americans, for it says at last that inflation-proof social security benefits are theirs as a matter of right, and not as something which must be temporarily won over and over again from each succeeding Congress."
- In 2012, the COLA increased benefits by 3.6 percent. There were no COLA increases in 2010 and 2011, however, because the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) upon which the COLA is based, did not rise in the first three quarters of 2009 and 2010, respectively. President Obama's American Recovery & Reinvestment Act of 2009 provided a one-time payment of250 to seniors receiving Social Security benefits to substitute for the lack of a COLA in 2010, but nothing was provided in 2011.
- The existing COLA understates inflation for seniors and people with severe disabilities. The current COLA is based on growth in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a basket of goods representing the typical buying patterns of working adults. It was the only index available in 1972, but it does not include the large majority of seniors and people with severe disabilities who do not work. It understates inflation, because it does not take into account the greater proportion of income that seniors and people with disabilities spend on health care. In 2009, individuals aged 65 or older spent 12.9 percent of their incomes on health care, compared with 5.3 percent spent by people ages 25-64. What is more, health care costs have increased 50 percent more than prices overall since 1989.
- The anticipated increase in the monthly premiums for the Medicare Part B (Medical Insurance) and Medicare Part D (prescription drug coverage will eat up all of the COLA of some beneficiaries and much of it for many). Medicare benefit premiums are generally subtracted directly from Social Security checks. These premiums are increasing well in excess of Social Security's COLAs.
- The Consumer Price Index for the Elderly (CPI-E) for Americans 62 and older does a more accurate job of measuring the purchasing power of Social Security benefits. The CPI-E is an experimental price index intended to represent the consumption habits of households aged 62 or older that the Bureau of Labor Statistics created to account for the greater share of income seniors spend on health care, as well as other expenses such as housing. From 1982 -- when the BLS started employing the CPI-E -- until 2007, the CPI-E increased 126.5 percent while the CPI-W rose just 110 percent. This suggests that a more accurate COLA based on the CPI-E should be more generous than the current one -- not less.
- The chained CPI would make an already-inaccurate COLA even less accurate. Some policymakers are discussing adopting a less generous COLA formula: the Chained Consumer Price Index for All urban Consumers (C-CPI-U), known more commonly as the chained CPI. Proponents of the chained CPI claim it is a more accurate measure of inflation because it accounts for higher-level price substitution, or the tendency of consumers to trade down for cheaper products when prices go up. But for seniors and people with disabilities who spend more of their incomes on health care, trading down is not a viable option.
- The chained CPI cuts Social Security benefits more with each passing year, hitting the most vulnerable Social Security beneficiaries the hardest. For the average earner, the chained CPI would cut benefits by $560 a year at age 75 (a 3.7% cut), $980 a year at age 85 (6.5% cut), and $1,392 a year at age 95 (9.2% cut). These cuts would hit seniors hardest in late old-age when they are most economically vulnerable. Many individuals reaching this age have little to no retirement savings to rely on to make up the difference. Since elderly individuals living on modest fixed incomes spend, on average, $56 on groceries for a week, cuts of that size may mean foregoing food or needed medicine. Further, the inaccuracy of the current measure (CPI-W), disproportionately harm demographic groups with longer life expectancies -- women, Asians and Latinos -- and all seniors who live beyond their average projected life expectancies. The even more inaccurate chained CPI would impose additional harm. It would also hurt people severely disabled at young ages, such as soldiers wounded in combat. Additionally, the chained CPI would reduce means-tested Supplemental Security Income (SSI) benefits, imposing the greatest hardship on the poorest seniors and people with disabilities.
Co-authored by Nancy Altman and Eric Kingson, Founding Co-Directors of Social Security Works and Co-Chairs of the Strengthen Social Security Coalition
Nancy Altman, author of The Battle for Social Security and Eric Kingson, Professor of Social Work at Syracuse University, are Founding Co-Directors of Social Security Works and Co-Chair the Strengthen Social Security Coalition . The authors both served as staff to the 1982 National Commission on Social Security Reform (the so-called Greenspan Commission).
For more information on the chained CPI's effect on Social Security and related programs and on the people who receive them, visit here or contact Nancy Altman (301-873-2610) or Eric Kingson (315-374-8338), or Don Owens, Communications Director of the Coalition and of Social Security Works 202-587-1653 (office); 202-302-5928 (cell); email@example.com