Close Close
ThinkAdvisor

Retirement Planning > Social Security

CPI-W vs. CPI-E: How Should Social Security COLAs Be Calculated?

X
Your article was successfully shared with the contacts you provided.

A new bill in Congress, the Fair COLA for Seniors Act of 2021would change the way that Social Security is indexed to keep up with inflation to adopt a consumer price index for the elderly (CPI-E).

Supporters of the plan say a CPI-E would provide a more accurate measure of calculating Social Security cost-of-living adjustments (COLAs). The CPI-E would use the same formulas and measures currently used by the consumer price index for urban wage earners and clerical workers (CPI-W), but would assign greater weight to the products that adults 62 and older actually buy, along with where this group shops.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about changing the method for indexing Social Security benefits to inflation.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Social Security benefits are currently tied to the CPI-W, which isn’t necessarily an accurate depiction of how the cost of living is increasing for older people collecting Social Security benefits. They have different spending habits and different needs than other groups of taxpayers. If there’s a way that we can use a more accurate measure to calculate the cost-of-living adjustments for Social Security recipients, we should jump at the chance to provide a greater measure of financial security to this group.

Byrnes: Older adults make substitutions in making purchasing decisions just like any other group of taxpayers. When the cost of one product rises, older people have the option of choosing to purchase another product in precisely the same manner as anyone else. There’s no reason to implement a special indexing procedure simply because this group is receiving Social Security benefits. 

____

Bloink: Indexing Social Security inflation increases to the consumer price index for the elderly (CPI-E) would reflect the true rising costs for older people and other Americans living on a fixed income. We need to take the way seniors actually spend money into consideration — especially remembering increased health care spending among this group, whose members often bear the brunt of rising prescription drug costs and other medical care in the U.S.

Byrnes: In reality, inflation tends to affect seniors even less than it affects other groups. All this change would do is add a measure of complexity to the tax code that we just don’t need at this juncture. 

____

Bloink: Seniors are at a particularly high risk of suffering because of rising costs. We can’t pretend that the needs of older Americans are precisely the same as the needs of younger groups as a whole. Of course, there are variations within the group. But as a whole, older adults are at higher risk of being cornered into purchasing certain products that they simply cannot substitute to make up for rising costs. The 2021 COLA was woefully insufficient given the disproportionate impact that the COVID-19 pandemic had on older Americans. We need to find a way to make the system fairer, and using a targeted means of inflation indexing is precisely the way to do that.

Byrnes: The complexity of changing to a CPI-E measure of inflation would be overly burdensome from an administrative perspective without providing the corresponding benefits that proponents claim. Under the current system, the 2022 Social Security COLA is projected to represent the largest increase in years — clearly reflecting the reality that seniors, along with all other groups, are struggling with rising prices.

___________________

  • Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
  • Discover more resources on finance and taxes on the NU Resource Center.
  • Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
  • Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.