	Social Security COLAs Under Current Law

Monthly Social Security payments for retired workers, disabled workers, and all other beneficiaries are generally increased annually by a cost-of-living adjustment (COLA) that is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W and Alternative Measures of Inflation

Inflation is generally measured by computing the increase in the cost of the goods that an average person purchases. The consumer price index for all urban consumers (CPI-U) is more broadly used than the CPI-W. BLS uses the same price data and methodology to compute the CPI-W and the CPI-U, but the CPI-U is based on the expenditures of about 87% of the population, whereas the CPI-W reflects expenditures of about 32% of the population. Persons aged 62 and older spend around twice as much of their direct outlays on health care as does the rest of the population, a difference that accounts for about half of the difference in the growth rates of the CPI-W and the Experimental Consumer Price Index for Americans Aged 62 and Older (CPI-E), a price index for the elderly. Unlike the CPI-W (and the traditional CPI-U), the C-CPI-U fully accounts for substitution by consumers and effectively eliminates small-sample bias. The C-CPI-U tends to increase at a slower rate than the CPI-W. Several bills to set Social Security COLAs equal to growth in a CPI for the elderly have been introduced in the 114 th Congress, such as H.R. It then discusses the projected impact on Social Security's overall finances of a change in the COLA. As a result, poverty rates increase with age. Changing how the COLA is computed is one of the few recent Social Security proposals that would affect current beneficiaries. Proposals to Base the Social Security COLA on the C-CPI-U and Partially Offset the Resulting Benefit Reductions

The President's 2014 budget proposed basing the Social Security COLA on the C-CPI-U, but it would also shelter older beneficiaries from the full effect of that change. That proposal was not included in either of the two subsequent proposed budgets. In 2010, similar proposals were made by the National Commission on Fiscal Responsibility and Reform (chaired by former Senator Alan Simpson and Erskine Bowles, hereinafter the "Fiscal Commission") and the Bipartisan Policy Center (chaired by former Senator Pete Domenici and Alice Rivlin). Other Options for COLA Changes

COLAs need not be linked directly to any measure of inflation. Other Federal Provisions Affected by the Social Security COLA Computation

Other Social Security Provisions Affected by the Social Security COLA Computation
The Social Security COLA affects other provisions of the Social Security program.
Monthly Social Security payments for retired workers, disabled workers, and all other beneficiaries are generally increased annually by a cost-of-living adjustment (COLA), which is based on growth in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a measure of inflation calculated by the Bureau of Labor Statistics (BLS). Several proposals would base the COLA on other measures of inflation produced by the BLS. Some would set the Social Security COLA equal to growth in the Chained CPI for All Urban Consumers (C-CPI-U), which is projected to reduce Social Security COLAs. Other proposals would use a measure of inflation experienced by older consumers, which is projected to increase benefits.
Proponents of using the C-CPI-U have included the 2010 National Commission on Fiscal Responsibility and Reform (chaired by former Senator Alan Simpson and Erskine Bowles) and the Bipartisan Policy Center's 2010 Debt Reduction Task Force (chaired by former Senator Pete Domenici and Alice Rivlin). The President's 2014 budget (but not subsequent budgets) proposed using the C-CPI-U to compute COLAs for Social Security and in some other federal spending programs; it also proposed indexing the tax code to the C-CPI-U, which would increase federal revenues.
Proponents of basing the COLA on the C-CPI-U argue that it is a more accurate measure of changes in the cost of living because it more fully accounts for how consumers adjust their purchases as relative prices of various items change and, unlike the traditional CPI, does not have a statistical bias that increases measured inflation. Using the C-CPI-U to compute COLAs is projected to reduce overall Social Security outlays by the government, because the C-CPI-U tends to grow more slowly than does the CPI-W, which in turn would result in lower Social Security COLAs.
Other proposals would link the Social Security COLA to a measure of inflation that is based on purchasing patterns of the elderly, such as the BLS's Experimental Consumer Price Index for Americans Aged 62 and Older (CPI-E). The CPI-E grows faster than the CPI-W, on average, because a larger portion of spending by the elderly goes toward health care expenditures and other items whose prices tend to rise more rapidly. As a result, switching to such a measure is projected to result in larger COLAs and higher Social Security benefits.
This report explains how the Social Security COLA is computed under current law and explains some criticisms of using the CPI-W to compute COLAs. It discusses two alternative measures of inflation, the C-CPI-U and the CPI-E. The report then explains how using those alternative measures would affect different groups and how it would affect Social Security's finances. It concludes with a review of key recent proposals to change COLA computations and other possible changes to the COLA.