What Is the Right Price Index for the Social Security COLA?

Alicia H. Munnell and Patrick Hubbard

Issues in Brief from Center for Retirement Research

Abstract: The U.S. Social Security Administration recently announced a 2022 cost-of-living adjustment (COLA) of 5.9 percent – the largest since the early 1980s. But critics continue to argue that the Consumer Price Index (CPI-W) currently used for adjusting Social Security benefits does not reflect the spending of older Americans on health care and therefore understates inflation. They urge the adoption of a special price index intended to reflect the spending patterns of Social Security beneficiaries – the experimental CPI-E. While historically the CPI-E, which covers those ages 62 and over, has risen faster than the CPI-W, the old relationship between the two indexes appears to have changed. In fact, if the 2022 COLA had been based on the CPI-E, it would have been 4.8 percent rather than the actual 5.9 percent. This brief explores the changing relationship between the CPI-W and the CPI-E. The discussion proceeds as follows. The first section describes the calculation of the CPI-W, used for Social Security. The second describes the CPI-E and its limitations. The third reports the relationship between the CPI-W and the CPI-E since 1983 and shows how it has changed in recent years. The fourth section identifies the factors that have narrowed the difference between the two measures. The final section concludes that a major reason for the disappearing differential has been the slowdown in the growth of medical care costs over the past two decades.

Pages: 10 pages
Date: 2021-11
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