Bipartisan Policy Center’s Post

Bipartisan Policy Center reposted this

View profile for Emerson Sprick, graphic

Economist at the Bipartisan Policy Center

Let's talk about Social Security's cost-of-living adjustments (COLAs). The method SSA uses to calculate annual COLAs leaves *absolutely no way* for benefits to lose value. Mechanically, inflation cannot outstrip COLAs—SSA calculates COLAs to precisely match inflation. (The exception is when year-over-year price levels decline, which last happened in 2009. When that happens, beneficiaries gain purchasing power because COLAs cannot be negative). A recent (deeply misleading) report pointed to the fact that COLAs have been lower than annual inflation in half of the past 15 years. Well, that's because SSA calculates the next year’s COLA based on inflation from the third quarter of the previous year to the third quarter of the current year. It does this so that it can implement the COLA on January 1 of each year, but it doesn’t change the fact that *COLAs account for a full year’s price increases.* Because of this, you would expect COLAs (reflecting Q3-to-Q3 inflation) to be larger than annual (Q4-to-Q4) inflation about half the time and smaller about half the time, which is exactly what the report finds.   There is some disagreement among policy experts over which measure of inflation SSA should use to calculate COLAs—some think benefits should grow slightly faster and some think benefits should grow slightly slower. But even if you use the more generous measure—a research index called the consumer price index for Americans 62 years of age and older, or CPI-E—monthly benefits in a beneficiary’s 20th year of retirement will only be 4% higher than they are under the current measure—nowhere near the ~20% this report found. In addition, if you look at the current price situation, of the three expenditure categories folks point to as being especially important to older Americans (medical care, housing, and energy), only housing is running hotter than overall inflation at the moment, and only bit a small amount! What's more, CPI-E has quite a few limitations, and it would probably actually skew COLAs in the *wrong* direction because it doesn't take into account the fact that consumers are pretty sophisticated, and when prices rise, they change their spending behavior. I've written a bit about that here: https://lnkd.in/e_g8Jefi. #socialsecurity #colas #retirement #costofliving #inflation Bipartisan Policy Center

  • No alternative text description for this image
Laura Satin

Chief Financial Officer: Michael N. Satin, Attorney at Law

2mo

Emerson Sprick, this is a great post, but inflation can be quite uneven, especially for those on a fixed income. Consider that a senior in an assisted living/independent living arrangement may see their rent increase by 5% per year per the lease agreement, regardless of how the COLA on their Social Security is calculated. They may see medical expenses not covered by Medicare rise by more than inflation as well. This is why most financial planners are trying hard to use data like this to reinforce the need for financial planning, particularly with respect to increasing life expectancies.

James M. Matthews, CFP®, CLU®, RICP®

🎙️ Helping High-Income Professionals 50+ Take the Guesswork Out of Retirement Planning 🎯 | Aspiring Retirement-Income Super-nerd🧠🤓

2mo

Excellent analysis, thank you for sharing.

Like
Reply
See more comments

To view or add a comment, sign in

Explore topics