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Social Security benefits will get a boost for next year following the announcement of the annual cost-of-living adjustment (COLA) on Friday, a debate is emerging over whether there is a more appropriate inflation gauge that should be used to update benefits.
The Senior Citizens League (TSCL) released a report noting that the current inflation gauge used to compute the annual Social Security COLA, known as CPI-W, has yielded slightly smaller COLAs than would’ve been doled out using an elderly-focused inflation metric, known as CPI-E.
It found the average CPI-E is about 0.1 percentage points higher than CPI-W. CPI-W tracks inflation among urban wage earners and clerical workers using a basket of consumer goods and services, whereas CPI-E measures inflation for Americans aged 62 and up, and is indexed based on the spending patterns of that age group.
TSCL estimated that over time, a retiree in 1999 would’ve received roughly $5,000 in extra benefits over 25 years due to the use of CPI-W instead of CPI-E. Those who retired in 2014 would’ve received a little more than $8,000 in extra benefits over 25 years under a formula switch.
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The Social Security COLA for 2026 will be announced on Friday. (Mark Felix for The Washington Post / Getty Images)
“If you retired in 2024, which is the last year we have the data point to make the calculation of the average starting benefit, we’re expecting somebody to lose about $12,000 over the course of a retirement,” said TSCL statistician Alex Moore in an interview with FOX Business.
Moore said that while that may not sound like a large amount, it could make a difference to a senior citizen’s ability to financially handle costs that come up while they’re in retirement.
By law, the Social Security Administration and Bureau of Labor Statistics are required to use CPI-W for calculating the annual COLA for Social Security benefits, so Congress would have to act to change the formula used.
While Democratic lawmakers have introduced bills to affect that change, those bills have died in committee in recent Congresses.
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Social Security calculates the annual COLA using CPI-W, rather than CPI-E or chained CPI. (Jeffrey Greenberg/Education Images/Universal Images Group via Getty Images / Getty Images)
The BLS notes that while government agencies have considered using CPI-E, it’s a research price index and has some limitations that may make it less relevant under some circumstances.
Those include a smaller sample size and higher sampling error for consumer spending categories, geographic areas sampled for the general population versus those 62 and older, outlets where prices are collected, as well as the item pricing due to the prevalence of senior citizen discounts.
Romina Boccia, director of budget and entitlement policy at the Cato Institute, told FOX Business that, “Basing Social Security’s COLA on the CPI-E is politically appealing for those who want to increase benefits, but it’s economically and fiscally misguided.”
She said that CPI-E is “an unreliable experimental index that tends to overstate inflation because it’s based on a narrow sample size (which increases sampling errors) and it doesn’t fully account for how consumers substitute toward less expensive goods when prices change.”
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Reports have indicated CPI-E would tend to have higher inflation reading, and larger COLAs, than CPI-W — whereas chained CPI would be lower. (Kevin Dietsch/Getty Images / Getty Images)
“A better measure is the chained CPI, which corrects these flaws and more accurately reflects how people respond to rising prices,” she added. “That’s why the federal tax code already uses the chained CPI — the more modern and accurate inflation index.”
“Applying chained CPI to Social Security would better align benefit adjustments with real inflation, not artificially inflated estimates that worsen the program’s already unsustainable finances.”
Chained CPI accounts for consumer substitution between similar items and updates its expenditure rates every month to reflect more current spending patterns than CPI-W, which fixes expenditure weights based on past consumer surveys.
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A Cato Institute analysis found that from 2013 to 2022, CPI-W overstated the rise in the cost of living by 0.26 percentage points when compared with chained CPI.
