Cost of Living and Social Security

Social Security retirement benefits are a target of fiscal cliff spending cut advocates. One specific proposal is to modify how cost of living adjustments are made to annual Social Security retirement benefits. I don’t get it.

Since 1975, the Social Security Administration has used changes in the Consumer Price Index (CPI) to adjust retirement benefits for inflation.  More specifically, the SSA uses the “All Items CPI for Urban Wage Earners and Clerical Workers (CPI-W)” to make this adjustment. This includes the “core CPI” plus the costs of food and energy, which are considered to be more volatile.

Apparently, some economists believe that the CPI used by Social Security to make cost of living adjustments is not a true measure of inflation, i.e., it overstates inflation. Therefore, these cost-cutting advocates want the “chained CPI” to be used instead.

What is the difference?  The chained CPI takes into account the substitutions that consumers supposedly make when prices rise. For example, assume that you are retired on a fixed income (e.g., Social Security benefits only) and like to eat pork chops once each month. Now assume that the cost of pork goes up. To manage your budget, you decide to buy more chicken because it is less expensive than pork. Therefore, according to the chained CPI, inflation has not affected you as much because you have substituted a less expensive product (chicken) for the pork you had been eating.


What if the prices of pork, beef and chicken all increase. Should retirees eat Spam instead? How about substituting ramen noodles for meat?  And if you do, does this mean that you are not hurt by inflationary increases in food costs?

The segment of our society that is the least capable of compensating for inflation is our retirees.  Nevertheless, the cost-cutters want to target COLA increases for Social Security benefits.

Why don’t they just admit that they want to cut Social Security benefits for everyone and stop pretending that seniors are getting a windfall from cost of living increases?

Increasing the retirement age makes more sense to me. What about you? Or maybe I don’t have a deep enough understanding of the chained CPI to evaluate its merits?



  1. Bill says

    One of the other problems with Chained CPI is that it has a two-year lag before the values are known. BLS only publishes preliminary values with the monthly CPI report, and goes back and revises them later. All of the values for 2011 show as “Interim”, and values for 2012 show as “Initial”. Only values through the end of 2010 are really known at this time. That makes it especially hard to use for adjusting things like COLAs.

    Jim Shambo had a great article in the Journal of Financial Planning November 2008 that analyzed CPI-U, and showed why it underestimates actual spending (granted Social Security uses CPI-W, not CPI-U, but the analysis still applies). One of my favorite examples from his paper relates to car prices. Various safety features are now mandated in cars, like seat belts, air bags, side air bags, child safety restraints, pollution controls, anti-lock brakes, etc etc. These all add to the price of a new car, but are not included in CPI-U (as they try to compare identical products month to month and year to year). A second example is refrigerators – 20-30 years ago they were all manual defrost and manual ice trays. Frost-free and ice makers cost something, but not according to CPI-U.

    So how to account for this in retirement planning? My solution is to assume that Social Security’s COLAs will not cover our spending increases. I use 2.5% for COLAs, 3% for TIPS, 3.5% for spending, and 5.5% for healthcare; we can certainly quibble over the proper rates. The additional impact of Chained CPI is minimal.

    As for fixing Social Security — my preferred method is to increase the cap. Only wages up through $110,100 (for 2012) are subject to FICA; the limit was set originally as 90% of all wages. But the inflation adjustments haven’t kept it at 90%. Make the cap 90% again. The problem with increasing the retirement age is that longevity has not increased uniformly; for lower income people it has actually decreased in the last decade.

    • DeeDee says

      Your ideas for planning are good. This doesn’t, however, provide much for those already retired and on Social Security. This sort of change might be tenable if you phased it in for future retirees that had time to plan, but it is not fair to those already retired. These guys are already taking a big hit in income from low interest rates. To switch the rules in mid-game is cruel. Our legislators and our president need to rethink this.

  2. Kathy says

    I agree with your about the COLA for Social Security. It seems to me that the COLA should be based on the kinds of things that retirees buy all the time (pork and chicken) and not on the kinds of things that are only occasionally bought (like cars and refrigerators).

    I have a problem with raising the full retirement age for Social Security beyond 67 (e.g. to 70). As the Boston College Center for Retirement Research has pointed out, a lot of people who will heavily rely on Social Security in retirement may not be able to work until they’re 70 because their job is manual labor (construction workers for example). Even retail work, standing on your feet for 8 hours a day, becomes pretty difficult as you get older.

    I have no problem with raising the wage limit as Bill has suggested, and even taxing 100% of benefits for those whose other income is high (e.g. over $250k AGI for example).

  3. says

    My letter to Obama on Chained CPI

    I’m a 71 year old widow with a Social Security income of $26,674.80/yr. From that I pay $104.90/mo for Medicare and $38.20/mo for my RX plan. When my husband died in ’09, I needed to move from my house in TX back to MI, or I would be broke by now. When I lost my SS and went to his alone, there was no way I could stay there. I found a sweet little condo in MI (paid for), and along with 2 annuities (1 diminished by the ’08 fiasco – my total annual income after health insurance and Medicare is $34,626.24). So far, I’ve been able to do okay here. From what I read, my SS is probably higher than most, so for that I am grateful. I know what some seniors on SS alone receive monthly, and I don’t know how they survive.

    All of the above being said, I am not extravagant. I would like to, but I don’t go on trips anywhere. I clip coupons to use when I shop. I’m relatively healthy. Slight high blood pressure, I rarely need medical attention. My only entertainment is my cable TV and going out to lunch once a month with the other old ladies who live in my complex. So far, I give my kids (8 adults, 4 grandchildren) $75 for their birthdays, and I spend a little more on each for Christmas.

    Even though my husband and I tried to plan well for our retirement, these annuities will not last my life time. When they drop off in a few years, I will be on SS totally.

    Since I moved back to MI, I’ve been in my condo almost 4 years; my sewer bill has increased $2 a year from $102.27/mo to currently $111.27/mo. My cable bill has increased from $106.42/mo to currently $139.60/mo with the only change in service being a new cable box. My supplemental health insurance has increased every year; last year I paid $1,836 for the year, this year $1988 for the year. I have a paid for car, and I’ve changed insurance companies every year since I’ve been here trying to keep ahead of an increase. I pay $2112/yr for condo association dues, which will also be going up for my 16 year old condo. My phone bill has gone from $61.74/mo to $64.54/mo. I was told at the beginning of the year that my heating would be cheaper, but I haven’t seen that yet. I run my thermostat at 67 degrees during the day in the winter and 58 degrees at night, and do not use my air conditioner unless the temp goes to over 90 degrees in the summer. Other than essentials, I rarely buy any new clothes; I have enough to last me for the rest of my life. Just about everything I buy at the grocery has increased in price. The only thing that has decreased were my property taxes, but that will increase as the economy comes back, and the equalized value of my condo increases. That, at least is a good thing, as I have already started looking for a cheaper place to live and hopefully I can get enough out of my condo; possibly going back into my own house or rent?? as some surrounding counties have a cheaper tax base. IN ONLY 4 YEARS. WHAT WILL THE NEXT 10 BRING???

    Tell me if I’m wrong here, but I think all of the above is called inflation???? So now, you no longer want to base SS cost of living adjustments on inflation, but instead on your chained CPI. That’s really going to help us over paid seniors.

    In closing, I know I’m really better off than most seniors, but I don’t think I will be able to stay in my condo after my annuities are gone. With you conceding on SS and going to the chained CPI there is no way seniors who are on SS alone will be able to survive. My hope at this point is my good health will not hold out, and I will leave this mortal vale.

    • Syntara says

      In response to your post, Ann S, I know on a certain level what you are dealing with. I hope you’ve noticed that it has been the Republicans in Congress trying to force President Bush to pull the plug and institute Chained CPI. That way, they can blame him when every retired and disabled American loses quite a bit of their benefit income. They Republicans can wash their hands of it all, even though it has been them trying to force the President to take that major leap and reduce beneficiary income substantially.

      I hope that never happens. I don’t know what some politicians have against Social Security, but they are indeed not for it. I just wish I knew why. For these politicians, the ones who have put in a minimum of 6 years of service in elected office, they will receive a nice retirement benefit from the government — so I guess to them, some of them, Social Security doesn’t mean all that much.

      I can tell you, to the rest of us, it means a really big deal. Most of us, I know for a fact, won’t have a retirement income in the $50’s+ from a job we only put in 6 years at like politicians can. Most of us won’t even see any corporate pension income as corporations have mostly converted to 401Ks and have gotten out of the business of funding their retired employees’ financial well being.

      And with what happened to the economy, as you pointed out, few of us can count on much beyond Social Security. Further, the majority of us are getting into our retirement years. What’s this going to further cause as damage to the economy if the majority of Americans (the seniors) are having to make do on even less than they can already count on?

      Social Security is not what is dragging this nation’s deficit down. Not when I can read recent reports stating that for an income earner receiving about $50,000/year at present, $6,000 of their yearly tax debt goes to subsidize Big Business. What they put toward Social Security is much less, we know.

      So why not address that elephant on the coffee table in the living room? The real problem is that we are subsidizing the most profitable entities on the planet. Why are we doing that, exactly? And then they talk about how we can’t afford “entitlements” like Social Security. I see some pretty big “entitlements” we TRULY cannot afford, looking us right in the face.

      • Syntara says

        MISTAKE TO CORRECT: I don’t know WHY I said President Bush when I meant President Obama in the above response to your post. Duh. I stand corrected. Sorry

  4. says

    Federal cost increase metrics seem to be deflated or non-representative of actual inflation. Specifically, The Bureau of Labor Statistics Consumer Price Index from August 2012-August 2013 was 1.5%. Yet, using the Bureau of Labor Statistics inflation calculator reveals that $1 in 2012 costs $1.02 in 2013. That’s .5% or 50 basis points more than the CPI. In 2013 the COLA adjustment is thought to be 1.5%.

  5. Syntara says

    While I am commenting on an older blog post about Social Security, you might find what I have to tell you very relevant.

    A couple of months ago I decided to voice my concerns over the future of Social Security via the Contact web page of the web site. I know President Obama gets lots of mail through that portal, so I decided to voice my concerns about Social Security’s future to our Vice President, Joe Biden, instead.

    I really did not expect a response, but I got one. My questions and concerns voiced to our Vice President had to do with Social Security’s REAL future as of this point in time.

    I did not get a response from Joe Biden, I got a personal letter sent directly to me by the Social Security Administration. In that letter they told me that VP Biden had forwarded my questions and concerns directly to the Social Security Administration, urging it to write back to me personally.

    They did.

    In that personal letter they told me they understood my fears, and as of now (we’ll say May, 2014) this is where things stand. They said in the letter, and I quote from it: “Unless Congress acts, the trust fund for Social Security Disability Benefits will be depleted by 2016.” No, that’s not a typo. I did say 2016, less than two years from now. What happens if Congress doesn’t act before that time? If Social Security’s Disability trust fund isn’t replenished or built up in some way, and if it stays on its current trajectory, it means that Social Security will only be able to pay citizens receiving disability benefits 80% of what they would otherwise be entitled to.

    What might this mean for current and yet to come disability recipients? Well, if the person in question would earn what is considered this year, 2014, to be the average monthly benefit amount of $1,293, in 2016, if Congress does not act, they will instead receive each month only $1,034. That’s a pretty big chunk of change when you are only earning $1,293 a month in the first place. That’s a loss of over $258 a month. That could be the utility bill, or groceries, or….you name it. Gone. All due to what WILL happen if Congress does not act between now and Janauary, 2016, to fix what’s wrong.

    There’s more.

    Quoting again from that personal letter sent me, they further state: “…and if Congress doesn’t act, by 2033, the trust fund for Social Security Retirement Benefits will be depleted.” Again meaning that Social Security will only be able to pay out 80% of all retirees’ benefits starting in 2033, if Congress doesn’t act.

    What’s to be done? I know there are a number of politicians who would just as soon see Social Security die due to neglect. So far, that strategy is working for them.

    I suggest anybody who plans to grow old and some day retire, needs to address the politicians representing their state regarding this situation. Nobody ever knows when they may grow older and possibly become disabled before they actually reach retirement age.

    If nothing is done in Congress, anybody regretfully falling into that category is going to be hit by a double whammy. First, the loss of career income and the onset of disability, followed by a loss in benefits due to them all because Congress didn’t act, and citizens didn’t push them to act.

    Fellow Boomers…. it’s time to take action. Address your state’s politicians from the local to the federal level to deal with Social Security in the here and now. This cannot be ignored, or Social Security WILL die of utter negelct.

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