Cost-of-Living Adjustments

Background

Recipients of Social Security benefits generally receive an annual cost-of-living adjustment (COLA) to account for changes in prices, also known as inflation. This COLA helps maintain the purchasing power of benefits over time. It 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). The Bureau of Labor Statistics has experimented with an index that reflects the experiences of older people(the Experimental Price Index for the Elderly or CPI-E). Inflation may affect older people differently than younger people because they tend to spend more of their income on health care, a sector whose prices have risen faster than other items in the economy.

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.

COST-OF-LIVING ADJUSTMENTS: Policy

Adjusting benefits for price increases

In this policy: Federal

AARP supports automatic cost-of-living adjustments (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.

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.