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Social Security’s ‘Chained COLA’ not ready for Prime Time

Newswise, March 23, 2012 — Social Security’s cost of living adjustments (COLA) are designed to protect against the erosion of retiree purchasing power when prices go up, as measured by the Consumer Price Index (CPI).

“Now Social Security self-styled ‘reformers’ seek to lower COLA every year based on their claim that COLA overstates inflation,” says Merton C. Bernstein, LLB, a nationally recognized expert on Social Security.

The proposed substitute for the current CPI formula, ‘Chained COLA,’ is based on the assumption that benefit recipients substitute lower-priced goods as prices go up.

“This the assumption is unrealistic for those millions who only have access to convenience stores that typically offer fewer choice and higher prices,” says Bernstein, the Walter D. Coles Professor Emeritus at Washington University in St. Louis School of Law.

“And, further, it is not reasonable to assume that most consumers can outwit the wiles of merchandising experts.”

Bernstein says that it takes two years to determine the data on which to base chained COLA, making it unsuitable for offsetting price increases that occur all the time.

“To adapt chained COLA to handle such a task would be either impossible or, if feasible at all, more costly to do so,” he says.

Impact on the wallet

Social Security actuaries calculate that a chained COLA would be .03 percent lower each year than the benefits projected under existing arrangements.

“This may seem miniscule for those with current job earnings and multiple sources of income, but benefits now are extremely modest — on average, about $1,100 a month,” Bernstein says.

“Moreover, under the present structure, COLA still chronically lags behind prices.

“COLA becomes operative when prices measured in the fall exceed the corresponding prices in the preceding fall. That percentage is applied to each beneficiary’s benefit for the next year starting in January. In consequence, Social Security COLA does not offset price increases when they occur. And it does not offset prices increases that take place during the year it is operative.”

Bernstein discusses the new COLA proposal in his recentHuffington Post article, “Proposed Social Security Chained COLA Not Ready for Prime Time.”