Opinion: Large increase in Social Security COLA could spark debate over appropriate index

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This fall, Social Security is expected to announce a 6% cost of living adjustment (COLA) for 2022. Such a large COLA – the largest in 40 years (see Figure 1 below) – is likely to revive the economy. debate over whether the government is using the most appropriate index to adjust social security benefits.

Critics argue that the CPI-W – the price index for urban and office workers, which is currently used to determine the COLA – underestimates inflation for retirees because older people spend more money for medical care and the cost of medical care has increased rapidly. Indeed, in 2007, the first year for which comparable data is available, older people spent more than twice as much on health care in relation to their total expenditure as the population as a whole.

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In 1987, Congress asked the United States Bureau of Labor Statistics to calculate a separate price index for people 62 and over. This index, called CPI-E, was extended until December 1982. From the third quarter of 1983 to the third quarter of 2020, the average annual increase in the CPI-E was 2.8%, compared to 2 , 5% for the CPI. -W.

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Interestingly, however, over the past two decades the difference between the rate of increase of the CPI-E and the CPI-W has almost disappeared (see Figure 2 below). While the CPI-E grew nearly 0.38% per year faster than the CPI-W over the entire period 1983-2002, the two indices showed almost identical average annual increases over the course of for the period 2002-2020. An earlier study concluded that the main reasons for this change were a slowdown in the rate of increase in the price of medical care and changes in transportation costs. (Transportation prices went from increasing slower than average to increasing at the average rate, which penalized young people more than older people.)

Not only has the differential all but disappeared, the CPI-E is not ready for prime time. It is not built from scratch, but simply involves reweighting the CPI data for all age groups. As a result, it suffers from several defects.

First, the results are based on a small number of households, which increases the sampling error.

Second, the prices are based on the same geographies and retail outlets used by young people and may not be representative of the location and types of stores frequented by the older population.

Read: Did you turn 60 last year? Social Security has a bad surprise in store for you

Third, the items sampled may not be the same as those purchased by the elderly.

Finally, the prices are the same as those indicated for the youngest and do not take into account the senior discounts.

Thus, if the decision were made to use an index for older people, a new index would be needed that would use a larger sample of older households and collect the prices of the products that older people buy in the places they shop. races.

My opinion? Much suffering for little gain.

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