The government announced last week that Social Security recipients won't get a cost of living allowance, or COLA, increase this year. This is the second year in a row that they haven't gotten a bump. If you are nearing retirement, this is worthy of concern.
Social Security COLAs are calculated every October by comparing the third-quarter data of the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, with the previous year's costs. An increase in the CPI produces a COLA paid the following January for retirees and other Social Security beneficiaries.
If you get a chance to lobby your Congressman on this matter, you might suggest to him that he push for a change in the way the cost of living index is computed for people of retirement age.
Dean Baker, who is an economist and co-director of the nonprofit, nonpartisan think tank Center for Economic and Policy Research, concurs with what many older people have been saying for years -- the CPI doesn't accurately reflect the increases in the price of things that they are buying. "They are spending more on health and less on computers," he says.
With a little tweaking, Baker says the Bureau of Labor Statistics already compiles the information that it would take to create a second CPI, a so-called CPI-E, that takes into account the needs of older people, but the information isn't being used. Baker speculates that's because officials are fearful it will drive the cost of Social Security higher.
"Congress has been looking for ways to cut Social Security, and if the consumer price index reflects higher costs for seniors rather than lower ones, it's harder to argue for cuts in benefits," he says.
Even if you think Social Security is due for an overhaul, using accurate information to calculate benefits is smarter than the way we're doing it today. Retirement planning is tough enough without relying on bad data.