Why the Current Social Security Cost-of-Living Index Is Hurting Retirees

The Social Security Administration announced a meager 0.3% cost-of-living adjustment (COLA) for 2017, providing sobering news to millions of Americans who count on the program to make ends meet. 

The average recipient received $1,238 in monthly benefits this year. The gain means they’ll take home just over $3 more per month in 2017. 

The increase was actually slightly higher than the figure Medicare trustees projected back in June, which was just 0.2%. And it’s an improvement over last fall, when the department declared no cost-of-living adjustment for 2016. 

But that may offer little solace to older Americans who continue to see their medical expenses outpace inflation.

Medicare Premiums Could Soar

The lack of a significant Social Security hike is especially troubling for the roughly 30% of beneficiaries who could face large Medicare premium increases next year.

This summer, Medicare officials proposed raising the Part B premium to $149 per month for 2017. That’s an increase of more than 22% from the current base premium of $121.80.

That shouldn’t affect the roughly 70% of participants who fall under the “hold harmless” provision, which prevents exisiting Medicare premiums from growing faster than the COLA. By law, their premiums can’t go up more than 0.3%, the amount of the Social Security adjustment.

But that means Medicare has to go after those who aren’t covered by “hold harmless” in order to help make up for higher operating costs. These include individuals who haven’t yet started collecting Social Security –  and those whose income exceeds a certain threshold (see The High Net Worth Guide to Medicare).

It’s not just the ultra-wealthy we’re talking about. Individuals who make more than $85,000 in adjusted gross income and couples who bring in more than $170,000 aren’t protected from premium increases.  In a year when most Medicare recipients will see relatively flat fees, the increase looks to be substantial.

Using the Wrong Inflation Measure?

Under current law, any year-over-year increase in Social Security benefits is pegged to a metric known as the Consumer Price Index for Urban Wage Earners, or CPI-W. But some advocacy organizations say that particular metric doesn’t reflect the actual cost of living for most seniors.

Groups including The National Committee to Preserve Social Security & Medicare want the Social Security Act amended to instead use the Consumer Price Index for the Elderly, or CPI-E. Both indices use the same prices for a basket of goods and services; the difference is how they’re weighted. The CPI-E figures expenses such as medical care and housing more heavily in the calculation, and gives less importance to factors like transportation. It was developed at the direction of the Older Americans Act of 1987 and is still called the "Experimental Price Index for the Elderly." 

How much difference would this substitution make? Quite a lot, as it turns out. Based on the latest available data, pegging the Social Security COLA to the CPI-E would lead to a 1.5% increase in benefits for 2017 instead of the paltry 0.3% uptick. And recipients would have received a 0.6% bump in 2016 rather than seeing their checks remain the same. 

The results are especially significant when you consider the compounding effect of COLAs over several years. That projected 1.5% jump next year would provide a larger base benefit for subsequent adjustments years down the road.

Changing to a different index isn’t as easy as it might sound. While the U.S. Bureau of Labor Statistics (BLS) has tracked the CPI-E since the 1980s, it’s never been an official measurement.  In order to make the index more accurate, the BLS would have to conduct more detailed research on the true cost of housing for older Americans and what types of products they buy. So far, that hasn’t happened.

The Bottom Line

Seniors can expect another year of virtually unchanged Social Security payments, even though most face higher costs from medical care and other needs. Unless Congress steps in and changes the way inflation is measured for Social Security benefits, this problem that will continue to affect older adults.For more, see Is the Consumer Price Index (CPI) a cost of living index?