Cost-of-Living Adjustments

Background

Recipients of Social Security benefits generally receive an annual cost-of-living adjustment (COLA). This adjustment accounts for changes in prices, also known as inflation. It helps to maintain the purchasing power of benefits over time. The adjustment occurs automatically without the need for congressional approval.

Several different inflation measures exist. Social Security currently bases its calculations on the inflation experience of workers living in urban areas (the Consumer Price Index for Urban Wage Earners and Clerical Workers or CPI-W). Another inflation measure is based on the experience of urban consumers. These inflation measures may not reflect the inflation experience of older people since they do not adequately reflect spending in the health care sector. Prices in health care have risen faster than other items in the economy. The Bureau of Labor Statistics has experimented with an index that may better reflect the experiences of older people (the Consumer Price Index for Americans 62 years of age and older).

Policymakers have considered caps or limits on COLAs. Such policies would substantially reduce the lifetime income of affected beneficiaries. Maintaining the full COLA is particularly important for women because they have a longer life expectancy.

COST-OF-LIVING ADJUSTMENTS: Policy

COST-OF-LIVING ADJUSTMENTS: Policy

Price increase adjustments

Automatic cost-of-living adjustments (COLAs) for Social Security benefits should continue. Those adjustments should be based on the most accurate available measure of inflation and should account for the spending patterns of older Americans.

COLAs should not be reduced arbitrarily to achieve budgetary savings.

Congress should not legislate changes to or politically interfere with the Bureau of Labor Statistics’ efforts to calculate the Consumer Price Index.

The Bureau of Labor Statistics should continue research on price indices that reflect the spending patterns of all beneficiaries to determine the most accurate index.