Most retirees rely heavily on Social Security for their income in retirement, and annual cost-of-living increases are an important way for seniors to keep up with rising expenses. Yet many Social Security recipients believe that the price index that the Social Security Administration uses doesn't accurately reflect the expenses that they pay. Instead, a measure called the CPI-E, or Consumer Price Index for the Elderly, aims to measure price changes for the items and services that seniors use most frequently.

A study from a leading senior advocacy group recently found that over time, using CPI-E rather than the current measure of inflation would have resulted in much different cost-of-living adjustments, with larger increases in most of the past 30 years. That result has led some senior advocates to conclude that Social Security has essentially been shortchanging seniors by not giving them annual increases that match to their actual costs.

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What is the CPI-E?

The origins of the Consumer Price Index for the Elderly go back to the 1980s. The Older Americans Act of 1987 directed the Bureau of Labor Statistics, which is responsible for most measures of consumer price inflation, to develop an experimental price index for Americans 62 years of age and older. The CPI-E was the result.

Early on, the BLS noted some of the major differences between the CPI-E and older measures of inflation. Higher demand for medical care services gives the CPI-E more exposure to healthcare cost increases than other inflation metrics. Housing costs also make a greater portion of the typical senior's spending. By contrast, food and transportation costs tend to make up a smaller percentage of spending, as do educational expenses and other goods and services aimed at younger consumers.

How much higher have senior prices climbed?

The latest statistics show that the CPI-E has generally outpaced other measures of inflation over time, and researchers at The Senior Citizens League argue that the resulting cost-of-living adjustments based on the less appropriate inflation index have been unfair to retirees. The graph below shows the differences between changes in the CPI-E and the actual cost-of-living adjustment that Social Security made, going back to 1985.

Data source: Bureau of Labor Statistics via Senior Citizens League.

Those differences might not look all that extreme. But when you compound them over a long period of time, they add up quickly. For instance, when you look at more than 30 years of history of CPI-E data, the difference between what actual Social Security cost-of-living adjustments were and what they would have been using CPI-E was 22 percentage points. That means that by the end of the time period, retirees would have been getting benefits that were higher by 22% of their starting monthly payment if they had gotten annual adjustments based on CPI-E.

Data source: Bureau of Labor Statistics via Senior Citizens League.

When you plug in actual figures, the money is substantial. The study showed that when you look at a 25-year retirement, those who retired in 2015 with typical benefits of $1,355 per month would receive almost $30,000 more in Social Security over their lives if they got CPI-E-based cost-of-living adjustments. Given that seniors actually face these higher costs, one could argue that the current way of calculating annual adjustments unfairly gives seniors less than they deserve in a true COLA.

Arguments against the CPI-E

Not all economists agree that the CPI-E is the most appropriate way to calculate cost-of-living adjustments for Social Security. For one thing, many recipients of Social Security benefits get benefits long before they turn 62. Disability benefits are the most common of these, but the family benefits that spouses and children are entitled to receive under certain circumstances can also go to younger people as well. Using CPI-E wouldn't accurately reflect changes in their costs of living.

Nevertheless, the majority of recipients of Social Security benefits are in the age cohort that the CPI-E covers. That's what makes the measure more appropriate in the eyes of the TSCL, and the group is therefore continuing its lobbying efforts to persuade the federal government to switch to the CPI-E in calculating cost-of-living adjustments going forward.

Given the current political situation in Washington, many Social Security policymakers are expecting measures that could put pressure on sustaining current benefits, let alone expanding them. Yet compared to the many proposals that were put on the table last year to expand Social Security benefits, the argument in favor of tying raises in seniors' benefits to price changes that seniors face both is internally consistent and makes common sense. Higher costs will make it hard for lawmakers to make such a change, but many agree that it would indeed be a fairer way of granting annual increases to Social Security going forward -- rather than shortchanging them with smaller boosts than they need.