OPINION: Social Security is likely to announce a 6% cost-of-living adjustment (COLA) for 2022. Such a large COLA — the biggest in 40 years — is likely to reignite the debate over whether the government is using the most appropriate index to adjust benefits.
This fall, Social Security is likely to announce a 6% cost-of-living adjustment for 2022. Such a large COLA — the biggest in 40 years — is likely to reignite the debate over whether the government is using the most appropriate index to adjust Social Security benefits.
Critics contend that the CPI-W — the price index for urban wage earners and clerical workers, which is currently used to determine the COLA — understates inflation for retirees because the elderly spend more of their money on medical care and the cost of medical care has been rising rapidly. Indeed, in 2007 — the earliest year for which comparable data are available — the elderly spent more than twice as much on medical care relative to their total expenditures than the population as a whole.
Not only has the differential virtually disappeared, but the CPI-E is not ready for prime time. It is not constructed from scratch, but simply involves a reweighting of the data from the CPI for all age groups. As a result, it suffers from several flaws.Second, prices are based on the same geographic areas and retail outlets used by younger people and may not be representative of the location and types of stores frequented by the older population.
Finally, the prices are the same as those reported for younger people and do not reflect any senior discounts. Thus, if the decision were made to employ an index for the elderly, a new index would be needed that used a larger sample of older households and gathered prices for the products that older people buy at the places they shop.
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