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Recalculate the COLA

Social Security benefits generally keep up with inflation through a cost-of-living adjustment, or COLA. Since 1975, Social Security has based such adjustments on the consumer price index, which measures changes in the prices of consumer goods and services. One option to modify Social Security would be to use an alternative price index for calculating the COLA. Options include:

  • Chained consumer price index: By applying a different formula to the same goods and services data, this index aims to account for ways consumers change their buying habits when prices change. Experts predict that the annual COLA would be on average 0.3 percentage points lower under this new formula. For example, if the current formula produced a 3.0 percent annual COLA, the chained consumer price index might yield a 2.7 percent COLA. The effect of a lower COLA would compound over time, reducing the benefit by 3 percent after 10 years and 8.5 percent after 30 years. Permanently reducing the size of the benefit adjustment every year is estimated to fill 23 percent of the gap.
  • Elderly index: This method aims to reflect specific spending patterns of older Americans, in particular the greater amounts they spend on health care costs. Experts predict that the annual COLA would be on average 0.2 percentage points higher under this formula. For example, if the current formula would produce a 3.0 percent annual COLA, the elderly price index might yield a 3.2 percent COLA. In addition, the effect of a higher COLA would compound over time, increasing the benefit by 2 percent after 10 years and 6 percent after 30 years. Permanently increasing the size of the benefit adjustment every year is estimated to increase the funding gap by 16 percent.

PRO (chained consumer price index): The index used for the COLA must provide the most accurate estimate of inflation. The best index is the chained consumer price index, which both measures the inflation experienced by a larger part of the population than the current index and better represents the way that real people react to price changes in different types of goods and services. (David John, Heritage Foundation)

PRO (elderly index): The current COLA doesn’t keep up with the inflation that seniors face because they spend more than other Americans for out-of-pocket health care costs and those costs rise faster than average inflation. The chained consumer price index would make matters worse by reducing the COLA. A more accurate Social Security COLA would compensate for the higher inflation that seniors actually experience by using an elderly index. (Virginia Reno, National Academy of Social Insurance)

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