Using a different index to measure Social Security’s cost-of-living adjustment could better reflect senior spending
Social Security’s cost-of-living adjustment could face changes under new proposals in Congress that aim to make it more reflective of the everyday costs incurred by older adults.
U.S. Rep. Ruben Gallego of Arizona introduced the Boosting Benefits and COLAs for Seniors Act, legislation that would change the calculations for Social Security’s cost-of-living adjustments. U.S. Sen. Bob Casey of Pennsylvania introduced companion legislation in the Senate.
Each year, the Social Security benefits for about 71 million Americans get a cost-of-living adjustment (COLA). It’s not a raise, but an adjustment to help keep pace with inflation.
Since 1975, the COLA has been based on the previous year’s consumer-price index for Urban Wage Earners (CPI-W). CPI-W reflects spending that a worker would face, such as expenses for food, consumer goods, transportation and housing.
Critics of this method of calculating the cost-of-living adjustment say it doesn’t focus enough on the spending habits of older Americans.
“This index does not survey the costs of retired households over the age of 62, leading to a significant discrepancy,” according to a statement by the Senior Citizens League, a nonprofit advocacy group.
The other measurement is the consumer-price index for Americans aged 62 or older (CPI-E), which was launched in 1983, and reflects the actual costs incurred by older adults. For example, within CPI-E, medical expenses are weighted more heavily than they are in CPI-W.
“CPI-E better reflects the changes in prices that older adults face,” said Richard Johnson, senior fellow and director of the program on retirement policy at the Urban Institute. “The CPI-W is based on spending patterns by workers. By definition, Social Security recipients aren’t working — so that’s the disconnect.”
Gallego’s proposal would direct the Social Security Administration to adjust benefits based on CPI-E rather than CPI-W — if the CPI-E would result in a larger increase in benefits. It also would direct the Bureau of Labor Statistics to calculate and publish the CPI-E monthly.
The Senior Citizens League said it would like to see the higher of the two indexes used every year. In an analysis of the two indexes from 2014 through 2024, the Senior Citizens League found that the CPI-E provided greater inflation protection and higher benefit growth over time. For example, the CPI-W for 2024 was 3.2%, but the CPI-E was 4%.
Johnson said the CPI-E usually shows a greater increase than the CPI-W, generally driven by escalating medical expenses.
Based on estimates by the Social Security Administration, the CPI-E would increase benefits 0.2 percentage points faster each year than the CPI-W, Johnson said. While not a massive difference, over a lifetime that difference would add up, he said.
Gary Burtless, senior fellow and economist with the Brookings Institution, cautioned that CPI-E has had periods when there was no difference from the CPI-W, and long periods when it would have produced a smaller COLA increase than the CPI-W.
The bill is endorsed by the American Federation of State, County and Municipal Employees; the Alliance for Retired Americans; and the AFL-CIO.
Johnson doesn’t see the bill going far in Congress.
“This has been talked about for at least a decade. If it were part of a broader package of Social Security reforms, maybe,” Johnson said.
Also, switching to the CPI-E would add to budgetary pressures on the Social Security system, which already faces financial stress, Johnson said.
The trust funds that back Social Security face insolvency in about a decade, at which point recipients would see only 77% of benefits paid out. Switching to the CPI-E would cost more and add to stresses on Social Security, Johnson said.