.
Alternative Inflation Measures for the Social
Security Cost-of-Living Adjustment (COLA)
Noah P. Meyerson
Analyst in Income Security
March 13, 2015
Congressional Research Service
7-5700
www.crs.gov
R43363
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Alternative Inflation Measures for the Social Security Cost-of-Living Adjustment (COLA)
Summary
Monthly Social Security payments for retired workers, disabled workers, and all other
beneficiaries are generally increased annually by a cost-of-living adjustment (COLAs), which is
based on growth in the Consumer Price Index for Urban Wage Earners and Clerical Workers
(CPI-W), a measure of inflation calculated by the Bureau of Labor Statistics (BLS). Several
proposals would base the COLA on other measures of inflation produced by the BLS. Some
would set the Social Security COLA equal to growth in the Chained CPI for All Urban
Consumers (C-CPI-U), which is projected to lower Social Security benefits. Other proposals
would use a measure of inflation experienced by older consumers, which is projected to increase
benefits.
Proponents of using the C-CPI-U have included the 2010 National Commission on Fiscal
Responsibility and Reform (chaired by former Senator Alan Simpson and Erskine Bowles) and
the Bipartisan Policy Center’s 2010 Debt Reduction Task Force (chaired by former Senator Pete
Domenici and Alice Rivlin). The President’s 2014 budget (but not subsequent budgets) proposed
using the C-CPI-U to compute COLAs for Social Security and in some other federal spending
programs; it also proposed indexing the tax code to the C-CPI-U, which would increase federal
revenues.
Proponents of basing the COLA on the C-CPI-U argue that it is a more accurate measure of
changes in the cost of living because it more fully accounts for how consumers adjust their
purchases as relative prices of various items change and, unlike the traditional CPI, does not have
a statistical bias that increases measured inflation. Using the C-CPI-U to compute COLAs is
projected to reduce Social Security outlays, because the C-CPI-U tends to grow more slowly than
does the CPI-W, which in turn would result in lower Social Security COLAs.
Other proposals would link the Social Security COLA to a measure of inflation that is based on
purchasing patterns of the elderly, such as the BLS’s Experimental Consumer Price Index for
Americans Aged 62 and Older (CPI-E). The CPI-E grows faster than the CPI-W, on average,
because a larger portion of spending by the elderly goes toward health care expenditures and
other items whose prices tend to rise more rapidly. As a result, switching to such a measure is
projected to result in larger COLAs and higher Social Security benefits.
This report explains how the Social Security COLA is computed under current law and explains
some criticisms of using the CPI-W to compute COLAs. It discusses two alternative measures of
inflation, the C-CPI-U and the CPI-E. The report then explains how using those alternative
measures would affect different groups and how it would affect Social Security’s finances. It
concludes with a review of key recent proposals to change COLA computations and other
possible changes to the COLA.
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Contents
Social Security COLAs Under Current Law ................................................................................... 1
The CPI-W and Alternative Measures of Inflation .......................................................................... 1
Criticisms of Basing the Social Security COLA on the CPI-W ................................................ 2
General Criticisms ............................................................................................................... 2
The CPI-W Overstates Overall Inflation ............................................................................. 2
The CPI-W May Understate Inflation Experienced by Older People ................................. 3
The Chained CPI-U ................................................................................................................... 3
Revisions to the C-CPI-U Would Complicate COLA Computations .................................. 4
Would a C-CPI-U Overstate Older Americans’ Ability to Substitute Among
Consumer Items? .............................................................................................................. 4
The Experimental CPI for the Elderly ....................................................................................... 5
Effects of Changes to the Social Security COLA: Policy Considerations ....................................... 5
Effect of Changes on Different Groups of Beneficiaries ........................................................... 6
Effect of Changes on Social Security’s Financial Status ........................................................... 9
Proposals to Base the Social Security COLA on the C-CPI-U and Partially Offset the
Resulting Benefit Reductions ..................................................................................................... 11
Offsets Proposed in the President’s 2014 Budget .................................................................... 11
Offsets in Other Proposals ....................................................................................................... 11
Other Options for COLA Changes ................................................................................................. 12
Figures
Figure 1. Projected Percentage Change in Retirement Benefits from Basing COLA on a
Different Measure of Inflation, by Age ........................................................................................ 7
Figure 2. Social Security Benefits as a Proportion of Beneficiary Units’ Total Income, by
Age, 2012...................................................................................................................................... 8
Figure 3. Projected Financial Effects of Changing the Social Security COLA ............................... 9
Tables
Table 1. Projected Effect of Changing the COLA on Social Security’s 75-Year Financial
Balance ....................................................................................................................................... 10
Appendixes
Appendix. Other Federal Provisions Affected by the Social Security COLA Computation.......... 13
Contacts
Author Contact Information........................................................................................................... 15
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Acknowledgments ......................................................................................................................... 15
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Social Security COLAs Under Current Law
Monthly Social Security payments for retired workers, disabled workers, and all other
beneficiaries are generally increased annually by a cost-of-living adjustment (COLA) that is
based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The
COLA applies beginning with the second year that a person is eligible to receive benefits. The
first-year benefit is based on a formula that is linked to overall wage growth.1 Under current law,
the COLA equals the percentage increase in the average CPI-W from the third quarter of the base
year (the last year for which a COLA was applied) to the third quarter of the current year.2 The
Bureau of Labor Statistics (BLS) generally releases the September CPI-W by mid-October, and
the Social Security Administration (SSA) then computes and announces the COLA. The COLA
becomes effective in December of the current year and is payable in January of the following
year. Social Security payments always reflect the benefits due for the preceding month. For
example, the payment that a beneficiary received in January 2015 reflected the benefit for
December 2014.
Since 1975, a COLA has been paid in every year except 2010 and 2011.3 A COLA of 1.7% was
payable in January 2015.4
The CPI-W and Alternative Measures of Inflation
Inflation is generally measured by computing the increase in the cost of the goods that an average
person purchases. The CPI-W is an estimate of the average change in prices of the goods and
services purchased by households whose income comes primarily from a clerical or wage
occupation.5 In general, BLS measures the price change of each item in the “basket” of goods,
and then computes overall inflation, weighting each of those price changes by the item’s share of
spending.
The consumer price index for all urban consumers (CPI-U) is more broadly used than the CPI-W.
BLS uses the same price data and methodology to compute the CPI-W and the CPI-U, but the
CPI-U is based on the expenditures of about 87% of the population, whereas the CPI-W reflects
expenditures of about 32% of the population.6 BLS introduced the CPI-U in 1978 and renamed
1 For details, see CRS Report R43542, How Social Security Benefits Are Computed: In Brief, by Noah P. Meyerson.
2 Automatic COLAs began in 1975; see 215(i) of the Social Security Act [42 USC §415(i)]. For additional discussion,
see CRS Report 94-803, Social Security: Cost-of-Living Adjustments, by Gary Sidor.
3 If there is a decrease in the CPI-W over the measurement period (if there is a decline in prices), Social Security
benefits are not reduced. Stated another way, if the change in the CPI-W over the measurement period does not result in
a COLA, benefits remain flat, as occurred in 2010 and 2011. The net payment does decline if deductions for Medicare
Part B and Part D premiums increase.
4 See CRS Report 94-803, Social Security: Cost-of-Living Adjustments, by Gary Sidor. Elements of many other federal
entitlement programs are indexed to inflation; see CRS Report R42000, Inflation-Indexing Elements in Federal
Entitlement Programs, coordinated by Dawn Nuschler.
5 For an overview of the CPI, see Bureau of Labor Statistics, “Consumer Price Index: Frequently Asked Questions
(FAQs),” August 15, 2013, at http://www.bls.gov/cpi/cpifaq.htm; and Clark Burdick and Lynn Fisher, “Social Security
Cost-of-Living Adjustments and the Consumer Price Index,” Social Security Bulletin, vol. 67, no. 3 (2007), at
http://www.ssa.gov/policy/docs/ssb/v67n3/v67n3p73.html.
6 The CPI-W is a subset of the CPI-U: the CPI-W represents expenditures by urban households that derive more than
one-half of their income from clerical or hourly wage occupations. See Bureau of Labor Statistics, “Consumer Price
(continued...)
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the existing inflation measure the CPI-W. The CPI-W continues to be used for the Social Security
COLA even though it measures the inflation facing a population—urban wage earners and
clerical workers—that by definition are employed, unlike most Social Security beneficiaries.7
However, the two measures tend to track each other closely.
Criticisms of Basing the Social Security COLA on the CPI-W
General Criticisms
Some shortcomings of the CPI are inherent in any price measure. For example, the CPI is based
on an average of all consumption in the nation, whereas actual purchases and prices paid vary by
individual. Therefore, virtually everyone will experience inflation that is either higher or lower
than the measured rate.
Other shortcomings are technical and can be addressed by changes in methodology. In recent
years, BLS has adjusted its processes to reduce an upward bias in the CPI.8 For example, they
have improved the adjustments they make to the index to account for the introduction of new
products and changes in the quality of existing products.
They have also incorporated procedures that partially account for the “substitution effect”—the
fact that consumers cushion themselves from the effect of relative price increases by adjusting
their purchasing patterns, and they take advantage of relative price decreases. For example, if the
price of apples grows much faster than the price of pears, people often buy more pears.
Conversely, if apples go on sale and pears do not, sales of apples will increase. A price increase
still reduces consumers’ standards of living, but the reduction is smaller than it would be if they
were forced to buy the same items every month.
The CPI-W Overstates Overall Inflation
BLS has identified two factors that cause the CPI-W (and the CPI-U, which uses the same
methodology) to overstate inflation.9 First, the CPI-W does not fully account for substitution. The
BLS calculates price indexes for 211 categories of goods in 87 geographic areas. The CPI-W
adjusts for the effects of substitution within those “item-area” categories, but not between them.
(...continued)
Index: Frequently Asked Questions (FAQ): Whose buying habits does the CPI reflect?,” at http://www.bls.gov/cpi/
cpifaq.htm #Question_3.
7 Most households with Social Security income receive no income from current work; see Social Security
Administration, Income of the Population 55 or Older, 2012, Washington, DC, April 2014, Table 2A.2, at
http://www.ssa.gov/policy/docs/statcomps/income_pop55/2012/sect02.html#table2.a2.
8 David S. Johnson, Stephen B. Reed, and Kenneth J. Stewart, “Price measurement in the United States: a decade after
the Boskin Report,” Monthly Labor Review, May 2006, pp. 10-19, at http://www.bls.gov/opub/mlr/2006/05/
art2full.pdf.
9 See Congressional Budget Office, “Using the Chained CPI to Index Social Security, Other Federal Programs, and the
Tax Code for Inflation,” Testimony of Jeffrey Kling Before the Subcommittee on Social Security, Committee on Ways
and Means, U.S. House of Representatives, April 18, 2013, pp. 2-4, at http://www.cbo.gov/publication/44083; and
Statement of Erica L. Groshen, Commissioner, Bureau of Labor Statistics, U.S. Department of Labor, Before the
Subcommittee on Social Security, Committee on Ways and Means, U.S. House of Representatives, April 18, 2013, at
http://waysandmeans.house.gov/uploadedfiles/groshen_testimony_41813ss.pdf.
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Second, a “small-sample” bias arises because BLS can collect only a sample of the numerous
prices in the economy. This bias is separate from the uncertainty that arises whenever an estimate
is based on a limited sample; the small-sample bias causes inflation to be systematically
overstated.
The CPI-W May Understate Inflation Experienced by Older People
In contrast, some analysts point out that the CPI-W may understate the average inflation
experienced by Social Security beneficiaries because older Americans consume a greater than
average share of goods whose prices tend to rise more rapidly than average, most importantly
health care and housing. The CPI-W tracks the spending habits of urban wage and clerical
workers, but about 80% of Social Security beneficiaries are aged 62 or older10 and therefore tend
to have different spending patterns. Persons aged 62 and older spend around twice as much of
their direct outlays on health care as does the rest of the population, a difference that accounts for
about half of the difference in the growth rates of the CPI-W and the Experimental Consumer
Price Index for Americans Aged 62 and Older (CPI-E), a price index for the elderly.11 Older
Americans also spend more than average on other goods whose prices usually rise faster than
average, such as housing.12
The Chained CPI-U
In August 2002, BLS introduced a supplemental index, the Chained CPI for All Urban
Consumers (C-CPI-U). Although the series was first published in 2002, BLS has produced
monthly values for the index beginning in December 1999.
Unlike the CPI-W (and the traditional CPI-U), the C-CPI-U fully accounts for substitution by
consumers and effectively eliminates small-sample bias.13 The weights used for the traditional
versions of the CPI are updated every two years to reflect changes in spending patterns. It
therefore does not fully incorporate the monthly effects of changing prices on spending patterns.
In contrast, when BLS estimates the C-CPI-U, it estimates weights for each month separately,
thus “chaining” the two months.14
10 CRS calculations based on data from the Social Security Administration, Annual Statistical Supplement, 2014, tables
5.A1 and 5.A10 at http://www.socialsecurity.gov/policy/docs/statcomps/supplement/2014/5a.html#table5.a1.2.
11 The weight on medical care in the CPI-E is 11.4%, compared with 7.6% in the CPI-U and 6.2% in the CPI-W. See
Bureau of Labor Statistics, “Table 1 (2011-2012 Weights). Relative importance of components in the Consumer Price
Indexes: U.S. city average, December 2013,” at http://www.bls.gov/cpi/cpiri_2013.pdf, and “Table 1 (2011-2012
Weights). Relative importance of components in the Experimental Consumer Price Index for Americans 62 Years of
Age and Older: U.S. city average, December 2013.” That spending excludes health benefits paid by employers or
federal government programs.
12 See Congressional Budget Office, “Using The Chained CPI to Index Social Security, Other Federal Programs, and
the Tax Code for Inflation,” Testimony of Jeffrey Kling Before the Subcommittee on Social Security, Committee on
Ways and Means, U.S. House of Representatives, April 18, 2013, pp. 12-13, at http://www.cbo.gov/publication/44083.
13 For more information on the C-CPI-U, see CRS Report RL32293, The Chained Consumer Price Index: What Is It
and Would It Be Appropriate for Cost-of-Living Adjustments?, by Julie M. Whittaker.
14 Bureau of Labor Statistics, Frequently Asked Questions About the Chained Consumer Price Index for All Urban
Consumers (C-CPI-U), at http://www.bls.gov/cpi/cpisupqa.htm. See also Robert Cage, John Greenlees, and Patrick
Jackman, Introducing the Chained Consumer Price Index, May 2003, at http://www.bls.gov/cpi/super_paris.pdf.
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The C-CPI-U tends to increase at a slower rate than the CPI-W. The Social Security
Administration’s Office of the Chief Actuary estimates that the C-CPI-U will grow an average of
0.3 percentage points more slowly than the CPI-W, which is equal to the average differential
since 1999. The Congressional Budget Office (CBO) estimates that the differential will average
0.25 percentage points, slightly lower than the historical average, because it excludes some data
from the early 2000s, before BLS made some methodological changes.
Revisions to the C-CPI-U Would Complicate COLA Computations
Because data on actual spending patterns are collected every two years, the initial release of the
C-CPI-U—which occurs several weeks after the end of the month for which inflation is being
measured—is based on estimated spending patterns. Interim estimates are released in February of
the next year. The final release, which is based entirely on actual spending data, is released the
following February, as much as two years after price data are collected.15
The lag between the initial and final releases of the C-CPI-U would complicate COLA
calculations. SSA announces next year’s COLA in mid-October, soon after BLS releases the
current year’s September CPI-W figure, as described above. To address the issue of the long time
lag between initial and final releases of the C-CPI-U for a given month, some have proposed
basing the Social Security COLA on the initial release of the C-CPI-U (the initial C-CPI-U is
published at the same time as the CPI-U and the CPI-W, i.e., just a few weeks after the end of the
month for which price changes are being measured). The difference between the initial and final
releases could be reflected in COLAs for subsequent years.16
Would a C-CPI-U Overstate Older Americans’ Ability to Substitute Among
Consumer Items?
Some argue that the low-income elderly have less ability than the average consumer to change
what they buy when prices change because they spend most of their income on essential items,
such as housing, food, health care, and utilities.17 These essential items are not good substitutes
for each other. For example, if the price of electricity rises, some low-income elderly might not be
in a position to reduce electricity purchases, particularly if they are already purchasing little
electricity.
If it is true that some low-income elderly have less ability to substitute among items in response
to relative price changes than other consumers, then the C-CPI-U would not capture the full
impact of relative price changes on the low-income elderly. That is, the C-CPI-U would
15 See CRS Report RL32293, The Chained Consumer Price Index: What Is It and Would It Be Appropriate for Cost-of-
Living Adjustments?, by Julie M. Whittaker.
16 Congressional Budget Office, Using a Different Measure of Inflation for Indexing Federal Programs and the Tax
Code, Economic and Budget Issue Brief, Washington, DC, February 24, 2010, at http://www.cbo.gov/ftpdocs/112xx/
doc11256/CPI_brief.pdf. See also Congressional Budget Office, Technical Appendix: Indexing with the Chained CPI-
U for Tax Provisions and Federal Programs, February 24, 2010, at http://www.cbo.gov/ftpdocs/112xx/doc11256/
WebAppendix.pdf.
17 “Economist and social insurance expert statement on Social Security COLA: No empirical basis for reducing the
Social Security COLA”, November 20, 2012, at http://s2.epi.org/files/2012/EPI_COLA_Letter.pdf.
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underestimate the impact of inflation facing the low-income elderly. However, there is little
research on this question.18
The Experimental CPI for the Elderly
In response to concerns about how effectively the CPI-W tracks the spending patterns of older
consumers, in 1987 Congress directed BLS to introduce an index for the elderly.19 BLS developed
the CPI-E and constructed values for the series for 1982 and later.20 However, a fully developed
price index for the elderly might differ from the CPI-E, which is computed using price data from
the same geographic areas and retail outlets as the CPI-W and CPI-U; only the consumption
weights differ. BLS commissioner Erica Groshen testified, “We recognize that elderly households
live in different places, shop at different retail outlets, buy a different mix of products, and even in
many cases qualify for different prices than other urban consumers.”21
The experimental CPI-E index also may not be appropriate for Social Security COLAs because
the over-62 population differs from the population of Social Security beneficiaries. Many Social
Security beneficiaries are under the age of 62, such as surviving children and most disabled
workers. And some people over 62 are not Social Security beneficiaries, such as the substantial
portion of persons aged 62 to 64 who have not yet claimed benefits.
On average, the CPI-E has increased by an average of about 0.2 percentage points faster than the
CPI-W or CPI-U since 1982. SSA’s Office of the Chief Actuary expects the differential to remain
at that level.
Several bills to set Social Security COLAs equal to growth in a CPI for the elderly have been
introduced, such as H.R. 649 in the 113th Congress, the Protecting and Preserving Social Security
Act, and S. 567 in the 113th Congress, the Strengthening Social Security Act of 2013.
Effects of Changes to the Social Security COLA:
Policy Considerations
This section discusses issues that may inform the debate about whether to base the Social
Security COLA on either the C-CPI-U or the CPI-E instead of the CPI-W. It first discusses how
the cumulative impact of such a change would grow as individuals aged and how Social Security
18 Alicia H. Munnell and William H. Hisey, Implications of a “Chained” CPI, Center for Retirement Research at
Boston College, Number 11-12, Boston, MA, September 2011, at http://crr.bc.edu/images/stories/Briefs/IB_11-
12_508.pdf. For a survey of the existing literature, see Thesia I. Garner, David S. Johnson, and Mary F. Kokoski, “An
Experimental Consumer Price Index for the Poor,” Monthly Labor Review, September 1996, at http://bls.gov/mlr/1996/
09/art5exc.htm.
19 P.L. 110-175, Section 191.
20 For a description of the experimental CPI-E and some of its limitations, see Bureau of Labor Statistics, Experimental
Consumer Price Index for Americans 62 Years of Age and Older, 1998-2009, Washington, DC, at http://www.bls.gov/
cpi/cpieart2009.pdf. See also CRS Report RS20060, A Separate Consumer Price Index for the Elderly?, by Linda
Levine.
21 Statement Of Erica L. Groshen, Commissioner, Bureau of Labor Statistics, U.S. Department Of Labor, Before the
Subcommittee on Social Security, Committee on Ways and Means, U.S. House of Representatives, April 18, 2013,
p. 7, at http://waysandmeans.house.gov/uploadedfiles/groshen_testimony_41813ss.pdf.
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becomes an increasingly important source of income for older beneficiaries. It then discusses the
projected impact on Social Security’s overall finances of a change in the COLA.
Effect of Changes on Different Groups of Beneficiaries
The effect of higher or lower COLAs would be cumulative; that is, the impact on benefits would
grow with each additional year of benefit receipt. Benefits for people who had just become
entitled, such as 62-year old retired workers or newly disabled workers, would be unaffected,
because first-year benefits are not affected by COLAs. The changes would always be small for
people who had only been entitled to benefits for a few years, and they would be small for all
beneficiaries in the first few years after a policy change, because those groups would have been
subjected to the higher or lower COLAs for only a short time. The changes would be largest for
people who received COLAs under the new policy for many years, such as the very old or people
who had been disabled for a long period.
For example, if the COLA was based on the C-CPI-U and it grew 0.3 percentage points more
slowly than the CPI-W, as projected by the SSA,22 then the benefits of 65-year olds—who will
have experienced three years of COLAs—would be reduced by 0.9% (see Figure 1).23 The
reduction would increase as the worker aged: to 3.7% at age 75 and 6.5% at 85.24 That is,
beginning 23 years after the policy was changed, scheduled monthly benefit payments for 85-year
old beneficiaries would be 6.5% lower than they would be under current law.
And if, for example, the CPI-E or a similar measure were used to compute the COLA and it grew
0.2 percentage points faster than the CPI-W, as projected by the SSA,25 then benefits would be
0.6% higher for retirees at age 65, 2.6% higher at 75, and 4.6% higher at 85.
Although the cumulative effect of a change in the COLA is largest for people who have been
subject to the change for many years, the number of people affected declines with age as people
die. For example, only about half of 62-year-olds live to age 84 (see Figure 1).
22 Social Security Administration, Office of the Chief Actuary, “Provisions Affecting Cost of Living Adjustment,”
Provisions, Provision A3, at http://www.ssa.gov/OACT/solvency/provisions/cola.html.
23 These effects would occur even for beneficiaries who claimed benefits later than age 62, because COLAs apply even
in years before a beneficiary begins to receive benefits.
24 These calculations assume CPI-W growth of 2.7%, the long-term assumption of the Social Security Trustees.
25 Social Security Administration, Office of the Chief Actuary, “Provisions Affecting Cost of Living Adjustment,”
Provisions, Provision A6, at http://www.ssa.gov/OACT/solvency/provisions/cola.html.
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Figure 1. Projected Percentage Change in Retirement Benefits from Basing COLA
on a Different Measure of Inflation, by Age
10%
5%
Changing to CPI for the Elderly
0%
Changing to Chained CPI-U
-5%
-10%
100%
Share of 62-year-olds living
to given age (right axis)
50%
0%
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
Age
Source: Congressional Research Service, based on Social Security Administration CPI-W, chained CPI-U, and
CPI-E assumptions; and National Vital Statistics Reports, National, United States Life Tables, 2010,
DHHS/CDC/NCHS, vol. 63, no. 7, November 6, 2014, at http://www.cdc.gov/nchs/data/nvsr/nvsr63/
nvsr63_07.pdf.
Notes: Projections are based on Social Security Administration assumptions that the Chained CPI for All Urban
Consumers (C CPI-U) would grow 0.3 percentage points slower than the Consumer Price Index for Urban
Wage Earners and Clerical Workers (CPI-W) and that the Experimental Consumer Price Index for Americans
Aged 62 and Older (CPI-E) would grow 0.2 percentage points faster than the CPI-W.
Because benefit changes cumulate, the effect of a change in COLAs on lifetime benefits would
depend on how long a retiree lives. On average, people who had higher earnings over their
lifetime live longer, so they would be most affected.26
However, older beneficiaries tend to have lower current income and to depend more on their
Social Security benefits than younger groups. At advanced ages, most beneficiaries are no longer
able to work, and many beneficiaries who had savings at retirement have depleted those savings.
For the minority of the elderly with defined benefit pensions, the purchasing power of those
payments generally declines over time because it is not usually indexed to inflation.27 As a result,
26 See, e.g., Hilary Waldon, “Mortality Differentials by Lifetime Earnings Decile: Implications for Evaluations of
Proposed Social Security Law Changes, Social Security Bulletin, vol. 73, no. 1 (released February 2013), at
http://www.socialsecurity.gov/policy/docs/ssb/v73n1/v73n1p1.html.
27 Employee Benefit Research Institute, “Pension Income of the Elderly and Characteristics of Their Former
(continued...)
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poverty rates increase with age. Among beneficiaries aged 65 to 69, 5.7% were poor in 2012; the
poverty rate for those 80 or older was 9.2%.28
Figure 2. Social Security Benefits as a Proportion of Beneficiary Units’ Total Income,
by Age, 2012
Older Beneficiaries are More Dependent on Social Security
Percent of Units
100
17
22
29
80
40
46
Benefits as
30
Share of
Income
31
60
31
Less than 40%
40%-79%
23
30
40
80% or more
54
47
20
40
31
29
0
Aged 62–64
65–69
70–74
75–79
80 or older
Age Group
Source: Social Security Administration, Income of the Population 55 or Older, 2012, Washington, DC, April 2014,
Table 9.A1, at http://www.socialsecurity.gov/policy/docs/statcomps/income_pop55/.
Notes: Beneficiary units are defined as married couples living together (at least one of whom is aged 65 or
older) and non-married persons aged 65 and older. Percentages may not sum to 100% due to rounding.
As shown in Figure 2, older beneficiaries depend more on their Social Security benefits than do
younger ones. For example, for more than half of those aged 80 and older (54%), Social Security
benefits are at least 80% of total income. In contrast, for only 29% of the 65-69 age group do
Social Security benefits represent at least 80% of total income.
(...continued)
Employers,” EBRI Notes, vol. 28, no. 3 (March 2007), p. 1, at http://www.ebri.org/pdf/notespdf/EBRI_Notes_03-
20071.pdf.
28 Social Security Administration, Income of the Population 55 or Older, 2012, Washington, DC, April 2014, Table
11.2, at http://www.socialsecurity.gov/policy/docs/statcomps/income_pop55/.
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Changing how the COLA is computed is one of the few recent Social Security proposals that
would affect current beneficiaries. Many options to reduce Social Security benefits would change
the way benefits are calculated for new beneficiaries, and many proposals would reduce benefits
only for people currently aged 55 or younger.
Effect of Changes on Social Security’s Financial Status
One measure of Social Security’s long-term financial status is the system’s annual income and
cost rates. Under current law, the Social Security cost rate—spending as a share of taxable
payroll—is projected to grow from about 14% today to around 17% in 2035 and later. (Taxable
payroll is all earnings subject to the Social Security payroll tax.) The income rate, which is all tax
revenue as a share of taxable payroll—is projected to remain around its current level of 13%.
Figure 3. Projected Financial Effects of Changing the Social Security COLA
Percent of Taxable Payroll
19
Cost rate with CPI-E
18
17
16
Current-
Cost rate with C-CPI-U
law cost
rate
15
14
13
Current-law income rate
12
11
2014
2019
2024
2029
2034
2039
2044
2049
2054
2059
2064
2069
2074
2079
2084
Year
Source: Social Security Administration, Office of the Chief Actuary, “Provisions Affecting Cost of Living
Adjustment,” at http://www.ssa.gov/OACT/solvency/provisions/cola.html
Notes: Projections assume COLAs are changed beginning with benefits paid in 2016. Dashed lines show the
cost rate if the Social Security COLA were computed based on the Chained CPI for Al Urban Consumers (C
CPI-U), assuming it would grow 0.3 percentage points slower than the Consumer Price Index for Urban Wage
Earners and Clerical Workers (CPI-W), and the cost rate if the COLA were computed based on the
Experimental Consumer Price Index for Americans Aged 62 and Older (CPI-E), assuming it would grow 0.2
percentage points faster than the CPI-W.
If the COLA were based on the C-CPI-U beginning in 2016, the Social Security actuary projects
that scheduled Social Security benefits would ultimately decline by about 4%, or 0.7% of taxable
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payroll (see Figure 3). Switching to the CPI-E would ultimately increase spending by about 3%,
or 0.5% of taxable payroll.
Table 1. Projected Effect of Changing the COLA on Social Security’s 75-Year
Financial Balance
Expected
Current-Law 75-
Average Annual
Year Deficit
75-Year Deficit
Projected Change in
Change in
(% of Taxable
Under Proposal
75-Year Deficit
COLA
Payroll)
(% of Taxable Payroll)
(% of Taxable Payroll)
COLA based
-0.3 percentage
2.32% -0.56%
on C-CPI-U
points
2.88%
COLA based
+0.2 percentage
on CPI-E
points
3.26% +0.38%
Source: Office of the Chief Actuary, Social Security Administration, Individual Changes Modifying Social
Security, Options A3 (“Starting December 2015, compute the COLA using a chained version of the consumer
price index for wage and salary workers (CPI-W).”) and A6 (“Starting December 2016, compute the COLA
using the Consumer Price Index for the Elderly (CPI-E)”), September 19, 2014, at http://www.ssa.gov/OACT/
solvency/provisions/cola.html. The 75-year deficit is a measure of the Social Security system’s imbalance; it equals
the present value of outlays less the present value of revenues over the next 75 years.
A second measure of Social Security’s long-term financial status is the system’s summarized
income and cost rates.29 The Social Security trustees project the 75-year summarized cost rate to
be 16.77% of taxable payroll and the summarized income rate to be 13.89%, resulting in a deficit
of 2.88%. Basing the COLA on the C-CPI-U beginning in 2015 would reduce the deficit by
0.56% of taxable payroll, according to the Social Security actuaries (see Table 1). Using the CPI-
E beginning in 2016 would increase the deficit by 0.38%, according to the Social Security
actuaries.
Setting the COLA equal to the C-CPI-U for benefits paid in 2016 and later would reduce
spending by $116 billion from FY2016 through FY2024, according to CBO.30 (CBO assumes that
the C-CPI-U will grow 0.25 percentage points slower than the CPI-W.) Budget estimates for
using the CPI-E are not available, but under the assumption that the CPI-E will grow 0.2
percentage points faster than the CPI-W, basing the COLA on it would increase Social Security
outlays by about $93 billion over the same period ($116 billion x (0.2/0.25)=$93 billion).
29 The summarized cost rate equals the projected ratio of the present value of outlays to the present value of taxable
payroll; the summarized income rate equals the projected ratio of the present value of revenues plus the current trust-
fund balance to the present value of taxable payroll.
30 Congressional Budget Office, Options for Reducing the Deficit: 2015 to 2024, November 2014, p. 16, at
http://www.cbo.gov/ftpdocs/120xx/doc12085/03-10-ReducingTheDeficit.pdf.
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Proposals to Base the Social Security COLA on the
C-CPI-U and Partially Offset the Resulting Benefit
Reductions
The President’s 2014 budget proposed basing the Social Security COLA on the C-CPI-U, but it
would also shelter older beneficiaries from the full effect of that change.31 That proposal was not
included in either of the two subsequent proposed budgets. In 2010, similar proposals were made
by the National Commission on Fiscal Responsibility and Reform (chaired by former Senator
Alan Simpson and Erskine Bowles, hereafter the “Fiscal Commission”)32 and the Bipartisan
Policy Center (chaired by former Senator Pete Domenici and Alice Rivlin).33
Offsets Proposed in the President’s 2014 Budget
The President’s proposal included a separate provision that would in isolation increase benefits
for older beneficiaries. The increase would begin at the age of 76 for retired workers and in the
15th year of benefit eligibility for disabled workers. The increase would be phased in over 10
years, so it would increase benefits for 85-year-olds by 5% of the average retiree benefit. Because
everyone would have the same increase, benefits would increase by more than 5% for people with
lower benefits and by less for those with higher benefits. A second benefit increase would apply
beginning at the age of 95, although that would affect relatively few people; less than 10% of
people aged 62 live until 95. On net, people with the lowest benefits would experience a slight
increase in benefits at some ages, because that provision would more than offset the expected
effects of the lower COLA.34
Offsets in Other Proposals
The Fiscal Commission proposed a similar measure; their “20-year benefit bump up” would
increase benefits by 5% of the national average benefit for persons who have been eligible for
31 See Fiscal Year 2014 Budget of the U.S. Government, p. 46, at http://www.whitehouse.gov/sites/default/files/omb/
budget/fy2014/assets/budget.pdf, and Office of Management and Budget, “Chained CPI Protections,” at
http://www.whitehouse.gov/omb/budget/factsheet/chained-cpi-protections.
32 The National Commission on Fiscal Responsibility and Reform, The Moment of Truth, Washington, DC, December
2010, at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/
TheMomentofTruth12_1_2010.pdf. See also Stephen C. Goss, Chief Actuary, Social Security Administration,
Estimates of the OASDI Financial Effects of the Plan Developed by National Commission on Fiscal Responsibility and
Reform, December 1, 2010, at http://www.ssa.gov/OACT/solvency/index.html.
33 Bipartisan Policy Center, Restoring America’s Future, Washington, DC, November 2010, at
http://www.bipartisanpolicy.org/projects/debt-initiative/about. See also Stephen C. Goss, Chief Actuary, Social
Security Administration, Estimates of the OASDI Financial Effects of Restoring America’s Future - a Plan Developed
by the Bipartisan Policy Center’s Debt Reduction Task Force, November 17, 2010, at http://www.ssa.gov/OACT/
solvency/index.html.
34 See Figure 1 of Paul N. Van de Water and Kathy Ruffing, Center on Budget and Policy Priorities, “Chained CPI
Proposal Would Cut Social Security Retirement Benefits by About 2 Percent, on Average,” April 23, 2013, at
http://www.cbpp.org/cms/?fa=view&id=3957. The President’s proposal would also use the C-CPI-U to index other
non-means-tested benefit programs and parameters of the tax code.
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benefits for 20 years (eligibility is defined as a determination of disability, or the earliest
eligibility age for retirement benefits, which would rise gradually from the age of 62 to 64 under
the commission’s proposal). The enhancement would be phased in over the five years from the
20th through 24th years after eligibility, in increments of 1% per year. The total 5% increase would
continue to apply in all subsequent years of benefit receipt. Both the Fiscal Commission and the
Bipartisan Policy Center also include measures that would increase initial benefits for people with
lower lifetime earnings.
Other Options for COLA Changes
COLAs need not be linked directly to any measure of inflation. Another option would be to have
COLAs be greater than inflation, for example by linking them to wage growth, which is on
average higher than price inflation.35 Currently, initial retirement benefits, which workers can
claim beginning at age 62, are linked to wage growth through the age of 60. Because COLAs are
linked to prices, retirees do not share in any of the increase in the purchasing power of wages that
occurs after they are 60 years old. In isolation, such a change would increase Social Security
spending, which would ultimately have to be offset either by an increase in taxes or a reduction in
initial benefits.
Under current law, all beneficiaries receive the same COLA (i.e., the percentage increase), but
some proposals would means-test COLAs. People with more income or higher benefit levels
would receive a lower COLA than people with lower income or benefits.36
35 See C. Eugene Steuerle and Jon Bakija, “Retooling Social Security for the 21st Century,” Social Security Bulletin,
vol. 60, no. 2 (April 1997), p. 56, at http://www.ssa.gov/policy/docs/ssb/v60n2/v60n2p37.pdf. Workers’ compensation
benefits under the Longshore and Harbor Workers’ Compensation Act are currently indexed to wage growth; see CRS
Report R41506, The Longshore and Harbor Workers’ Compensation Act (LHWCA): Overview of Workers’
Compensation for Certain Private-Sector Maritime Workers, by Scott D. Szymendera.
36 See Andrew Biggs, “Means Testing and Its Limits,” National Affairs, no.9 (fall 2011), p. 111, at
http://www.nationalaffairs.com/doclib/20110919_Biggs.pdf.
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Appendix. Other Federal Provisions Affected by the
Social Security COLA Computation
Other Social Security Provisions Affected by the Social Security
COLA Computation
The Social Security COLA affects other provisions of the Social Security program. By law, if
there is no change over the relevant measuring period in the CPI-W, and consequently no COLA,
there can be no change in the following program parameters:
• The taxable wage base, which is the amount of covered wages subject to the
Social Security payroll tax. The taxable wage base is $118,500 in 2015.
• Exempt wage and salary amounts under the retirement earnings test, which
reduces the monthly benefit of Social Security beneficiaries who are below the
full retirement age and have earnings that exceed an annual threshold. The
exempt amounts are $15,720 for workers under full retirement age in 2015 and
$41,880 for workers who reach their full retirement age in 2015.37
• Substantial gainful activity (SGA) amounts for blind individuals who receive
Social Security disability benefits. The threshold for these individuals is $1,820
in 2015.38 (The SGA amount for nonblind individuals may increase even when
there is no COLA.)
These program elements are adjusted annually based on the increase in the national average wage
index only if there is a COLA. As a result, these program elements remained at their 2009 levels
in 2010 and 2011, but they were adjusted upwards in subsequent years, when COLAs were paid.39
Other Programs Affected by the Social Security
COLA Computation
Beneficiaries of other programs are also affected by the absence of a Social Security COLA,
including low-income elderly and disabled persons, veterans, and federal civil service annuitants.
As a result, beneficiaries of the programs listed below did not receive COLAs in January 2010
and January 2011.
37 For more information on the retirement earnings test, see CRS Report R41242, Social Security Retirement Earnings
Test: How Earnings Affect Benefits, by Dawn Nuschler.
38 An individual who receives Social Security disability benefits may not have earnings above a certain amount, known
as the Substantial Gainful Activity (SGA) amount.
39 By law, other program elements are adjusted annually based on the increase in the national average wage index
whether or not a COLA is payable (such as the SGA amount for non-blind individuals who receive Social Security
disability benefits). For more information, see the SSA fact sheet at http://www.ssa.gov/pressoffice/factsheets/
colafacts2014.pdf.
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The Social Security COLA triggers an increase in benefits paid under
• Supplemental Security Income (SSI),40
• Veterans’ Pension Benefit Programs,41 and
• Railroad Retirement Board (RRB) Programs.42
COLAs under the following programs are not triggered by the Social Security COLA, but they
use the same measurement period and formula for computing COLAs as the Social Security
program:
• Civil Service Retirement System (CSRS)43 and
• Military Retirement System.44
The Federal Employees Retirement System (FERS) uses the same measurement period for
computing its COLA as the Social Security program, although a modified formula is used to limit
the COLA.45
Benefits paid to disabled veterans and to survivors of certain service members and veterans under
the following programs are not automatically indexed for inflation. However, Congress enacts
legislation each year to provide a COLA equal to the Social Security COLA for
• Veterans’ Disability Compensation46 and
• Dependency and Indemnity Compensation (DIC) for Survivors.47
40 For more information, see CRS Report 94-486, Supplemental Security Income (SSI), by William R. Morton.
41 For more information, see CRS Report RS22804, Veterans’ Benefits: Pension Benefit Programs, by Umar Moulta-
Ali and Carol D. Davis.
42 For more information, see CRS Report RS22350, Railroad Retirement Board: Retirement, Survivor, Disability,
Unemployment, and Sickness Benefits, by Scott D. Szymendera.
43 For more information on COLAs under CSRS, see CRS Report 94-834, Cost-of-Living Adjustments for Federal Civil
Service Annuities, by Katelin P. Isaacs.
44 For more information, see CRS Report RL34751, Military Retirement: Background and Recent Developments, by
David F. Burrelli and Barbara Salazar Torreon.
45 In addition, non-disabled retirees under the age of 62 who are covered by FERS do not receive COLAs. For more
information on COLAs under FERS, see CRS Report 94-834, Cost-of-Living Adjustments for Federal Civil Service
Annuities, by Katelin P. Isaacs.
46 For more information, see CRS Report RL34626, Veterans’ Benefits: Disabled Veterans, by Umar Moulta-Ali et al.
47 For more information, see CRS Report R40757, Veterans’ Benefits: Dependency and Indemnity Compensation (DIC)
for Survivors, by Umar Moulta-Ali.
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Author Contact Information
Noah P. Meyerson
Analyst in Income Security
nmeyerson@crs.loc.gov, 7-4681
Acknowledgments
The original version of this report was written by former CRS Analyst Alison M. Shelton.
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