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

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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.

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Read/Post Comments (27) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 08, 2014, at 11:27 PM, dusty10x wrote:

    ...............So the article wants us to thank Obama because he was not allowed to rob us?........................

  • Report this Comment On March 09, 2014, at 7:52 AM, yamahauler79 wrote:


    The fact that you cannot see where this country is headed on it's current path, shows your lack of intelligence.

    Which facts are wrong on Fox?

    The ones that come out of the Dem's mouths or just the ones out of the Repub's mouths?

  • Report this Comment On March 09, 2014, at 7:57 AM, jimwolf511 wrote:

    Let me see here.. 2014, a voting year, and it is not looking good for democrats in many senate races.. I wonder if their is any correlation here.. Oh yeah, DUH, of course their is...

  • Report this Comment On March 09, 2014, at 8:49 AM, sherik wrote:

    Seniors cannot afford any cuts-in Michigan our repug gov has even begun to tax our pensions to give tax breaks to wealthy corporations!!

  • Report this Comment On March 09, 2014, at 9:18 AM, clutch58 wrote:

    It's about time you public union members started getting some skin in the game, sheri.

  • Report this Comment On March 09, 2014, at 9:45 AM, bklyn43 wrote:

    They don't tell you WHAT products they use in counting COLA ... But I can tell you what they DON"T include, Minor things like Groceries and Gas! So what do they use? perhaps Automobiles and Televisions? That really helps us Mr. Oblamer.

  • Report this Comment On March 09, 2014, at 9:51 AM, TuChingadaMadre wrote:

    meeeto writes: "You do "no" brain damaged caused by watching fox news is covered by ACA,,,, GET HELP soon!!! Geez meeeto, I heard watching MSNBC robs ones ability to properly use the English language. Do you "KNOW" what I mean? Go back to school. P.S. you blew it on the word damage as well!

  • Report this Comment On March 09, 2014, at 10:20 AM, jolo wrote:

    No cuts should be made to social security and medicare/Medicaid I pay 295.00 a moneth after working 50 years for this trash and it still don't cover dental optical dermatology etc. so we should have the same Insurance free as the politicians do.

    if any cuts are made it should be to all the over head in Washington dc not the poorest people on the planet ( this shows that its all set up for the rich ran by the rich and they will do whatever the rich tells them to do. so why do we even need 1,075 free loaders setting in Washington dc? + all the other 1,000's of Govt./federal workers trim the fat starting with them not the poor and working retired and elderly

    and I do not thank Obama for one thing he has doen all has been for the rich.

  • Report this Comment On March 09, 2014, at 10:30 AM, GhostdogWarrior wrote:

    What this really means?

    "Im scared we are going to lose even more seats in Novemeber because of my retarded ACA so I will do what I do best and buy some votes to avoid certain annhilation." -BHO

    Both parties blow so don't give me your tired fox news rhetoric

  • Report this Comment On March 09, 2014, at 10:39 AM, webobserver wrote:

    Well, I for one am living large on the $6.00 extra I get each month. Hey Mr. Pres, a 1% raise (maybe) each year is not going to make or break the USA.

    Of course, my insurance policy was cancelled by Obamacare, so now I pay an extra $64/mo (in addition to Medicare of course), so it's a real lose-lose situation.

    Not to mention paying tax on on tax. Wow, we seniors really have it great.

  • Report this Comment On March 09, 2014, at 10:45 AM, mumsie wrote:

    Proposed cuts will not effect those currently on Social Security. COLA raise are usually less than $20 a month. You idiots plan to vote for the party that wants to abolish Social Security over $20 a month? Nobody needs to push you under a bus you are crawling there on your own.

  • Report this Comment On March 09, 2014, at 10:52 AM, hoss82260 wrote:

    Social Security is paid into by everyone that works, not everyone lives long enough to draw their Social Security. Welfare is paid by tax dollars. Has anyone ever noticed that they keep saying Social Security (which is paid into by working people) will run out of money, but Welfare (which is paid by tax dollars) is never mentioned as running out?

  • Report this Comment On March 09, 2014, at 10:59 AM, Grandmabooboo wrote:

    @ Bklyn43, WRONG.

    The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

    FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)

    HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

    APPAREL (men's shirts and sweaters, women's dresses, jewelry)

    TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)

    MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

    RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);

    EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);

    OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

  • Report this Comment On March 09, 2014, at 11:34 AM, ddh1961 wrote:

    Owebama is trying to preserve some sort of voter base for Dems til the elections are over, kinda like his changing the rules on Owebamacare. It's all about the votes, but hopefully the sheeple will see through it all and vote the leftists out...

  • Report this Comment On March 09, 2014, at 11:45 AM, sept41951 wrote:

    How can I thank the great one for preserving what I worked 40 years for? thank you! thank you! thank you! You are an economic genius!!!! All America thanks you!!

  • Report this Comment On March 09, 2014, at 12:01 PM, JImbojoker wrote:

    Wow another hook headline wreaking of anti Obama sentiment followed by oodles of flies flocking to the stinky mess. Did not see this coming (read with a slight twinge of sarcasm)

  • Report this Comment On March 09, 2014, at 12:06 PM, bigjohn327 wrote:

    obama sends out a budget every year and the senate votes it down nearly 100 to 0,,,,,his budget is a waste of paper,,,,,,

  • Report this Comment On March 09, 2014, at 12:17 PM, chswad wrote:

    Chained CPI assumes those eating steak will buy chicken

    Chained CPI assumes those eating chicken will buy dog food

    Chained CPI assumes those eating dog food will eat each other.

  • Report this Comment On March 09, 2014, at 12:59 PM, johnnywitt wrote:

    I f we went back to a 70-91% top income rate and stopped trying to have the largest military in the world by a factor of ten, then maybe we could go back to being the greatest country in the world.

    We need a complete reset. We need to go back to what worked in this country in the first place, which was having the strongest and best educated middle class population in the history of the world.

    Taxing only the first 115k, or so of a millionaire's salary isn't going to cut it anymore either. Additionally, SSI needs to be means tested for the very wealthy.

  • Report this Comment On March 09, 2014, at 1:09 PM, FmMaj9 wrote:

    Does anyone really care what Obama's budget says? It won't even get a single vote in the Senate, if it's even offered. Nothing Obama says means anything: it's what he does, which is almost always the opposite, that matters.

  • Report this Comment On March 09, 2014, at 1:20 PM, LadyMantle wrote:

    It seems to irk a lot of Americans that some people are on social security during this economic melt down. It's okay to have a bunch of kids and be on welfare though. People work and pay into social security as do the people that employ them over the years. This is not an entitlement. It is a "savings account" generated by your "work" history.

    Welfare is an entitlement. The people drawing from it are generally unemployed, 20 something single women who make a career out of having children and get paid big checks every month from the state so these kids can have everything that the rest of us have to "work" for. Why do we perpetuate this welfare system?

  • Report this Comment On March 09, 2014, at 1:44 PM, jrgreenejr wrote:

    I am one of the 'entitled' collecting SS and don't have a problem with the government trying to reduce costs with some fuzzy math solution. However it must apply to ALL government employees and recipients of government funding, whether public or private. States receiving funds for infrastructure, universities grants for research, and private enterprises that are in danger of collapse because of management or risk.

    Each of these entities which apply for funding must present a plan of salary reductions or restraint which would use this fuzzy math.

  • Report this Comment On March 09, 2014, at 2:48 PM, cvdf3476hy54 wrote:

    Obama supporters will go hysterical over this well sourced list of 573 examples of his lying, lawbreaking, corruption, cronyism, etc.

  • Report this Comment On March 09, 2014, at 4:00 PM, LaryB wrote:

    Perhaps the worst thing Republicans and their potential presidential candidates can do is continue their "war" on the elderly in this country. I am not saying that reforms don't need to happen, but what should those reforms be? The Social Security fund may indeed be going broke. But whose fault is that. Certainly, it is not the fault of the elderly, their only crime is getting older. The actual fault lies squarely with the Congress of the United States and the President at the time Lyndon Johnson. When Johnson was President the Democratic Congress voted to "steal" the Social Security fund and remove it from its protected status and move the funds into the general fund. That single move allowed the

    Congress to spend those dollars on anything they deemed more important than Social Security. That has amounted to just about everything else. The money that should have gone to the elderly has gone, instead, toward an awful lot of pork. You have to wonder, how much money would still be in the fund if the Congress had not "stolen" it.

  • Report this Comment On March 09, 2014, at 4:56 PM, rogueknight wrote:

    This is all BS, regardless of which way you look at it - CPI-W or CPI-E. Both are designed to keep seniors and disabled in a poverty level status! I received a whopping $27 a month increase this years COLA, and that's more than a lot on disability/SSA. Take into consideration that my benefits decreased because of the COLA increase, the cost of gas, medical & prescription cost increases, etc etc, I'm still in the hole every month struggling to make ends meet.

    They are right about the fact that seniors don't have the same spending habits as those in their 20's & 40's. By the time you reach 60, you pretty much have accumulated what others are trying to attain. But why happens when the appliances go on the blink? TV broke? Computer crashed? Car needs repairs?

    And has anyone considered the cost increases in housing, insurance, groceries, utilities, prescriptions? Vehicle requirements are mandatory insurance & registration, in addition to routine maintenance. Medical conditions require prescriptions to maintain health. Even being frugal by using coupons & checking ads it's nothing to spend $75+ a week for groceries per person. Utilities are constantly increasing.

    Just where does it all end????

  • Report this Comment On March 09, 2014, at 7:13 PM, Disgustedman wrote:

    I am not going to worry. I have enough medications to overdose on and send myself off to the twilight and not have to fight to survive in a world that is being handed over to the "I'm entitled" crowd.

  • Report this Comment On March 10, 2014, at 9:13 AM, M0Self wrote:

    It would be much better of the SS COLA was actually tied to things that seniors buy like groceries and gas.

    The current ties are to things like ipads; I don't know about you but I can't eat an ipad.

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