Obama's Budget Preserves COLA for Social Security: What it Really Means to Seniors

Seniors may have dodged a Social Security cost-of-living adjustment reduction this year, but an underlying question remains: how much the elderly pay for health care and what Social Security can do better to help address those costs. Read on for more.

Mar 8, 2014 at 11:00AM

Despite a narrow brush with a new reduction to Social Security benefits, seniors will not see the proposed move to a more conservative cost-of-living adjustment, or COLA, in 2014.

President Barack Obama's announcement on Feb. 2 that he was scrapping the earlier proposal preserves the status quo for seniors -- for now. The grand budget compromise it was supposed to prompt did not materialize.

The back and forth on COLAs, however, is not resolved. It is deeply linked to larger issues of what we mean when we talk about inflation and expenses for the elderly. Let's look at the landscape, as it stands, and what hasn't yet been addressed when it comes to COLAs and seniors' costs.

COLA: What actually (almost) happened -- CPI-W versus chained CPI
Obama originally sought last year to link Social Security's COLAs to a more conservative measure of inflation. Currently, Social Security is pegged to a consumer price index known as the CPI-W. It's a broad measure of merchandise costs, and it's categorized by a demographic that includes urban wage-earners and clerical workers. It measures many goods, sold in many places, over time. The idea is that the COLA given under Social Security changes to keep pace with trends in the costs of these goods under this index.

There is, however, more than one consumer price index. And the president proposed a switch from CPI-W to the "chained" CPI. It's called "chained" because while it's linked to shifts in the prices of different kinds of goods, it often refocuses to lower-cost (and perhaps lower-quality) goods to account for the fact that consumers tend to buy cheaper goods in an inflationary environment. One upshot of this difference is that the chained CPI can suggest a lower rate of inflation than the CPI-W.

And that's no small change.

The Center for Economic and Policy Research put it this way: If we start measuring the growth of inflation by the smaller numbers of the chained CPI, the average worker retiring at age 65 would see a reduction in benefits of about $650 each year by age 75. The reduction grows to roughly $1,130 annually by the time you reach age 85.

What's at stake: Seniors and the cost of health care
For now, there will be no downward change in the COLA for Social Security. A deeper problem looms, however. Are we measuring how we allocate Social Security COLAs to seniors in a way that makes good sense, in light of the things they pay for the most?

According to the Bureau of Labor Statistics, the goods people over the age of 62 buy are different from what people in their 20s and 40s tend to purchase. Consider, for example, the weight of health care in the equation.

Rather than rank medical services' relative importance at about 6%, as the CPI-W does, CPI-E tells us that for seniors it should be considered nearly 15% of total expenditures.

Typical Social Security benefits of $1,269 per month don't take you very far in paying for doctors and hospitals. A lifetime of health care for an average recipient living to 95 can rise as high as $318,800.

And, generally speaking, that number represents what's paid after Medicare covers its part of the bill -- with seniors' private health insurance or other resources helping to cover the rest. And then there are the Part B and Part D premiums to consider.

Money for medical services clearly has to come from somewhere other than just Social Security -- the benefits of which account for at least 50% of annual income for two-thirds of seniors, and for 90% among one-third of them. So, private health insurance, savings, investments -- these are important factors as well. There might, however, be a better way to represent how COLAs augment those resources that seniors do have: the CPI-E.

Rather than peg COLAs to the cost of goods that people in their 20s and 40s buy, the still-experimental consumer price index for the elderly emphasizes the importance of the kind of goods and services that seniors use most. Like health care.

So why don't we use it?

One does find the CPI-E lurking, now and then, in proposed bills. A recent inclusion: Senator Mark Begich (D-Alaska) made CPI-E part of his Protecting and Preserving Social Security Act, in 2013. The legislation has been sitting in subcommittee since April 2013.

Some might tell you that fiscally conservative politicians are more interested in cutting benefits programs than expanding them. Others could point to the CPI-E's experimental status -- suggesting that until the Bureau of Labor Statistics receives the funding to fully build out the index, uncertainty about its effectiveness remains.Whatever the nature of the process, however, it doesn't alter what is at the core of the CPI-E option: More accurately measure the consumer behaviors of the demographic receiving benefits that are attached to inflation, and you'll allocate their COLAs with more accuracy as a result.

And that would remove some of the pressure from seniors when it comes to proposals such as Obama's recent plan, which would give them less to pay for the things they use the most, all because less significant purchases are still the standard by which their cost of living is measured.

Social Security plays a key role in your financial security. In our brand-new free report, "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

James O'Brien is a WiserAdvisor contributor.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers