Changes to Social Security COLA Could Hurt Retirees

With lawmakers under the gun to avert a slew of impending tax hikes and spending cuts scheduled to kick in on Jan. 1, Social Security advocates fear that harmful changes to the program could be crammed into a last-minute budget deal.

President Obama has said he'll waste no time in seeking a bipartisan solution to the fiscal crisis. But AARP told Congress in a letter Thursday that any budget deal should not include a measure known as the chained Consumer Price Index to calculate the Social Security cost-of-living adjustment. Moving to a chained CPI would be "inappropriate and unwarranted," the letter said, adding it would lower COLAs for retirees, the disabled and other Social Security beneficiaries.

Currently, COLAs are based on the Consumer Price Index for Urban Wage Earners (CPI-W), which measures inflation by calculating the cost of a basket of goods and services from year to year. This formula understates the inflation that most older adults experience because it fails to reflect the rising cost of health care. We know all too well that medical costs rise much faster than inflation in general  and it's what older people tend to spend much of their income on.

Using the chained CPI to measure inflation would be even more detrimental to the pocketbooks of some 56 million Social Security beneficiaries.

That's because inflation grows more slowly using the chained CPI since it's based on the principle of substitution. It assumes that consumers substitute cheaper products for more expensive ones - like buying fish when the price of beef rises - so their expenses don't climb as much. But that formula doesn't take into account medical expenses, which generally can't be substituted.

According to the National Committee to Preserve Social Security and Medicare, a typical 65-year-old man who filed for early Social Security benefits would lose about $130 per year in benefits compared with using the current system. By the time he reached 95, his annual benefit cut of 9.2 percent would cost him almost $1,400.

If the chained CPI was used to measure inflation, the 1.7 percent Social Security COLA for 2013 would have been 1.4 percent.

The average Social Security payment is about $1,236 a month. For nearly two-thirds of older American households receiving benefits, it's their primary source of income. A third of those households depend on it for nearly all their income.