One of the most important and valuable benefits built into our robust social security program is the feature providing for cost of living adjustments. This feature was added to the social security system in 1975 as a way to protect retirees from the ravages of inflation which can eat away at one's purchasing power. This is no small benefit and can be especially critical for lower income retirees who struggle to make ends meet as it is.
Unfortunately, for only the third time in the past 40 years, there will be no cost-of-living adjustment for social security benefits in 2016. The other two times this happened were in 2010 and 2011, also as a result of the protracted low inflation environment we've experienced over the past 7 years. Given that over 65 million Americans receive benefits from social security, this zero cost-of-living adjustment will have a significant impact on approximately 20% of the U.S. population.
The Social Security Act provides for an automatic increase in social security benefits "if" there is an increase in inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Since there was no increase in that index over the past 12 months ending September 2015, there will be no cost of living adjustment to social security benefits for 2016. Although the cost of living adjustments from 2012-2015 were a modest 3.6%, 1.7%, 1.5% and 1.7% respectively, these adjustments remain a valuable benefit in helping retirees to keep up with overall price increases encountered in day to day living.
So what was the primary factor resulting in a zero cost-of-living adjustment? As you may have guessed it was declining energy prices. The steep reduction in energy costs had a significant effect in driving the overall inflation rate to zero. But therein lies the more important issue at hand. Is the government using the appropriate CPI index as it pertains to measuring cost-of-living for retirees?
Many groups advocating for retirees have long complained that CPI-W is not the appropriate indicator for cost-of-living affecting retirees. People who work have different spending patterns than retirees. For example, when compared to retirees, people who work spend more time driving (therefore spend more on gasoline) and also spend less on health care and long-term care than retirees. There is no question that cost of living increases for health care and related expenses has increased at a much greater rate, and affect retirees more, than the costs related to energy prices.
Given that medical care costs are rising faster than other goods, advocates for retirees favor using what's called the CPI-E (E for elderly), which attempts to take into account the different spending patterns for retirees. To that end, Rep. Eliot Engel (D-N.Y.) has introduced a bill that would amend the current law by requiring the use of the CPI-E instead of the current CPI-W when calculating COLA for people on social security.
This is clearly an important issue affecting a large and growing sector of our population. Seniors are already suffering as a result of a protracted low-interest rate environment which has held interest rates on CD's and other safe and liquid investment options at historical lows and, as a result, have reduced there income in retirement.
Millions of our seniors, especially our lower income seniors, are suffering as they struggle to make ends meet. It is unacceptable, I believe, to have a mechanism within the social security system which systematically disregards the cost of living factors which are specifically applicable to our senior population. Let's credit Congress who in 1975 added a mechanism (cost-of-living adjustments) to the social security system to help protect our seniors from rising prices in retirement. Now it's time to refine that mechanism so that we can once again help to take care of our seniors in a more effective and meaningful way.
Ash Ahluwalia, NSSA, CCSCA, MBA