Is there a better way to determine if Social Security benefits should increase?

Social Security recipients won’t be getting a cost of living increase in their benefits next year.

That’s led to some grumbling about how the price of everything seems to be going up but benefits aren’t going up.

It’s also led to a discussion about a better way to calculate cost of living adjustments (COLA) whether they should go up or not.

That discussion centers on the Consumer Price Index (the current calculation called CPI-W) vs. an index that also takes inflation trends into the equation (called CPI-E).

But, according to the good folks at the Center for Retirement Research at Boston College, using CPI-E over CPI-W would not have made a difference for 2016 and would not have made a difference in some past years.

As long as medical costs continue to slow in their rate of increase, Social Security recipients are better off with the current measure of consumer prices as an indicator of whether benefits should increase. The same is true for transportation costs, said the center, which have also stabilized.

“If the rate of medical inflation continues to be held in check, inflation of the elderly and non-elderly may look quite similar,” said the center in a recent study entitled Do We Need a Price Index for the Elderly? “On the other hand, if medical care costs start to rise more rapidly again, it may be time to construct and use an index designed specifically for older Americans.”

Since 2002, according to the report, average CPI-W and CPI-E inflation have been virtually identical due mainly to slower growth in health costs.

The Consumer Price Index measures changes in the price level of a market basket of consumer goods and services purchased by households.It has been used as the basis to calculate Social Security cost of living increases since the 1980s.

The knock on the index, according to the center, is that it uses a relatively small sample of households, prices may not be reflective of the store used by older people, samples used in the index might not be purchased by the elderly at all, and the availability of senior-citizen discounts is not reflected.

Hence the emergence of CPI-E, where the E stands for Elderly, which the U.S. Bureau of Labor Statistics says
“calculates an experimental price index for Americans 62 years of age or older.”

While use of the experimental index might have made a difference to benefits had it been used prior to 2002, the Center for Retirement Studies argues it wouldn’t have made a difference since then, primarily because of health costs.

“First, the rate of increase in the price of ‘medical care’ slowed from 5.6 percent in 1983-2002 to 3.5 percent in 2002-2015. Given that older Americans spend so much of their budget on this item relative to the population as a whole, the slowdown in cost growth substantially reduced the inflation they faced,” said the report.

“Second, prices for ‘transportation’ moved from rising slower than average in 1983-2002 to rising at the average rate in 2002-2015. Since older people spend relatively less on transportation, they were less affected than younger people when the relatively slower rate of increase in transportation costs disappeared.”

But prices of goods and cost of services can be cyclical and fluctuate, in particular as the care needs advance with the aging Baby Boomer population.

The center understands that, saying: “On the other hand, if medical care costs start to rise more rapidly again, it may be time to construct and use an index designed specifically for older Americans.”