Economics, Entitlements

Are Seniors Being Cheated? No

The Wall Street Journal reports that “Expenses Rise Even if Social Security Doesn’t,” saying that:

Thanks to low average inflation nationwide, for the second year in a row retired Americans’ Social Security checks in 2011 won’t include a cost-of-living increase. But even though the inflation rate has been low for about two years, older people are paying more for a variety of items.

The Journal cites data from the Consumer Expenditure Survey showing that, from 2007 through 2009, spending by retirees in a number of areas increased, by an annual average rate of around 1.5 percent. To unwary readers, rising spending by seniors would imply increases in prices for seniors, but that’s really not the case here.

The Consumer Expenditure Survey tracks how much individuals spend on certain categories of items, not necessarily how much individual items cost. For instance, apples might fall in price but I could spend more in total on apples by purchasing more of them. Over time, of course, as standards of living rise we tend to consume more, so rising spending by seniors might be a good thing rather than bad. The Consumer Expenditure Survey by itself does not distinguish between prices and quantities.

That’s why we rely on the more familiar Consumer Price Indices. Social Security COLAs are calculated using the CPI-W, which is the Consumer Price Index for Urban Wage Earners. The CPI-W as of the third quarter of each year (meaning, the average of the July, August, and September figures) is compared to that of the previous year. If the CPI-W has increased, a COLA is paid the following January.

If you look at the CPI-W from the third quarter of 2009 through the third quarter of 2010, however, it increased by 1.47 percent. If so, how can it be that no COLA will be paid in 2011? The reason becomes clear if you look at previous years: from 2008-2009, the CPI-W dropped by 2.18 percent, yet in January 2010 seniors didn’t receive a negative COLA of 2.18 percent. Rather, they received a zero percent COLA. The Social Security Act says that in years in which inflation is negative seniors don’t receive a negative COLA, but instead receive zero COLAs until the CPI catches up to its previous high. The CPI-W was at 215.59 in the third quarter of 2008 but is still only at 213.98 today, so a COLA will not be paid until it rises above its previous “peak.”

But doesn’t the conventional CPI understate price increases for seniors, since seniors spend more of their incomes on healthcare, where prices are rising faster? To a degree. But even the experimental CPI-E, which tracks prices for items purchased by individuals 65 and older, shows that prices peaked during late 2008 and still have not regained prior levels.

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Moreover, many economists believe that both the CPI-W and the CPI-E tend to overstate inflation because they fail to account for how purchasing patterns change in response to changing prices. If the price of apples rises, for instance, individuals don’t simply purchase the same numbers of apples at the higher price; rather, they’ll tend to purchase fewer apples and more oranges. An alternative CPI, called the “chain weighted” or C-CPI, better accounts for these patterns and, according to the Bureau of Labor Statistics, “is designed to be a closer approximation to a ‘cost-of-living’ index than the present measures.” On average, the C-CPI shows lower inflation than either the CPI-W or the CPI-E.

So the short story is a) rising spending by seniors doesn’t necessarily mean rising costs for seniors; b) inflation has fallen in recent years but seniors haven’t received negative COLAs, temporarily increasing the purchasing power of their benefits; and c) even if a CPI designed for retirees were used, no COLA would be paid next year.

For more on the Social Security COLA, see “A Diet COLA for Social Security? Not Really.”

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