Cost-of-Living Adjustments

Background

Social Security benefits are increased to account for inflation. If Social Security benefits did not keep pace with increases in the prices of goods and services, beneficiaries would experience a significant decline in their standard of living during retirement. The annual cost-of-living adjustment (COLA) helps maintain the purchasing power of benefits over time. Full COLAs help all beneficiaries keep up with inflation.

Any COLA reductions, such as limits or caps, 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.

One policy question is what measure of inflation should be used to adjust Social Security benefits. Currently, Social Security benefits are adjusted annually according to increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W reflects the spending only of families that derive most of their income from wage earners or clerical workers. It excludes families whose main sources of income are pensions and Social Security. The Consumer Price Index for All Urban Consumers (CPI-U) includes all consumers. It more closely reflects beneficiaries’ and older individuals’ purchasing patterns. Both of these measures may understate inflation as experienced by older individuals, particularly because of their higher medical costs. The Bureau of Labor Statistics has constructed an experimental index (the CPI-E) that better reflects the consumption of people age 62 and over. This index shows that the rate of inflation for those 62 and over has been higher than the rate measured by either the CPI-W or the CPI-U in most years.

Cost-of-Living Adjustments: Policy

Adjusting benefits for price increases

In this policy: Federal

AARP supports automatic COLAs for Social Security benefits. 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. AARP supports creating a measure that more accurately reflects the purchases of older consumers.

AARP supports continuing research on price indices that reflect the spending patterns of all beneficiaries to determine the most accurate index.