Inflation is different for seniors

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Inflation is everyone’s enemy because it erodes purchasing power. But it’s even more insidious to seniors because of how much they spend on health care.

Health-care cost inflation has outpaced the overall inflation rate over time. Social Security payments rise with the general inflation level, but what does that mean for seniors if the inflation they experience is higher? It means a declining standard of living.

The COLA for Social Security payments is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which is a subset of the Consumer Price Index for All Urban Consumers, or CPI-U. The CPIs are reported monthly, but Social Security benefits are adjusted annually. The 2014 benefits were increased by 1.5 percent.

There is an experimental CPI for the elderly called the CPI-E. According to the Bureau of Labor Statistics, or BLS, the CPI-E includes households whose reference person or spouse is 62 years of age or older. The BLS estimates that in 2009–2010, approximately 24 percent of all consumer units met the CPI-E’s definition of having a reference person or spouse 62 years of age or older. The graph shows a comparison between the CPI-W, the CPI-E, and a third index, the CPI-U, which represents about 88 percent of the U.S. population.

The results aren’t as clear cut as you’d expect. Over the 1983-2011 time frame, the CPI-E, in general, outpaced the other measures of inflation. But from 2006-2011 the CPI-W outpaced both CPI-E and CPI-U — not by much — just 0.1 percent, with CPI-W at 2.4 percent versus 2.3 percent for the other two. If President Obama is right about the Affordable Care Act reining in medical cost inflation, then CPI-W could continue to outpace CPI-E.

There’s been some discussion in changing how the COLA is calculated for Social Security benefits. In the Washington Post’s Wonkblog last year, Dylan Matthews wrote, “If CPI-E were in effect today, it would result in $56 more a year in payments to some who retired in 2001 to maximum benefits.”

OK, that’s less than I thought it would be, but it still represents higher average payments to seniors.

Read How you will know inflation is back for more on the topic.

Do you think there’s a need to change how the COLA is calculated for Social Security? Would you be willing to take a chance on the government using CPI-E?

Follow me on Twitter: @drdonsays.