COLA Differences by Different Calculations and Their Impacts

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With the wide array of calculating inflation that is confusing and appears to overly complicated - it is.  While it may seem to fairly straight forward, again, it is not.  Not only does the BLS use CPI-U and CPI-W for different applications, but there are also - get this - subjective input and as they say, because the BLS says it makes sense.  It is not this writer's intent to educate the deep dive into inflation, the objective is to give you a bit more sense of understanding how and why it affects us so significantly negative.

A calculation was conducted from year 2007 through 2023 on three different methods of determining inflation - using the Bureau of Labor Statistics index numbers.

• The first is using exactly the same BLS method.
• The second was adding each month from Jan through Dec to determine the cumulative inflation.
• The third was using each month from Jan through Dec by multiplying each subsequent month and compounding it - ie, the multiplying Jan inflation result by its increase for Feb, then Mar etc for the entire year.
• The results between the first two methods above were essentially the same result of dollar increase over the 14 year period with a starting benefit amount of $15,000 for the initial year.
• The difference between the current scheme and the second method above resulted in a $66 dollar shortfall to the recipient in year 2023..
• The difference between the current scheme and the third method above resulted in a whopping $2,560.86 shortfall to the recipient in year 2023.
• Recognition is given to the fact the percentages and amounts will vary between recipients based upon their amount received in 2007.
• Bear in mind, these calculations do NOT include the increases and the corresponding affects to COLAs.
• Furthermore, these calculations also do NOT determine your impacts on your COLA as affected by your income tax brackets and respective impacts as noted in the Interesting and Sad Facts about Social Security section.

Although the Social Security Administration may provide a COLA, this increase is based on the average prices of a basket of consumer goods that may not reflect the actual expenses of Social Security recipients. (U.S. Bureau of Labor Statistics. "Consumer Price Index Frequently Asked Questions." Select "What Goods and Services Does the CPI Cover?") 

A study by the Center for Retirement Research found that retirees lose buying power in two ways, even with a COLA. First, Medicare Part B premiums tend to rise faster than inflation, resulting in a net loss of buying power. Second, the threshold for taxing Social Security benefits is not adjusted for inflation, meaning that a high COLA may increase one's tax burden. ( Munnell, Alicia H. and Hubbard, Patrick. "The Impact of Inflation on Social Security Benefits." Issue in Brief, Center for Retirement Research, vol. 21, no. 14, August 2021, pp. 1-7.) 

AND FINALLY - A study by Mary Johnson, Social Security Policy Analyst, of the Senior Citizens League published in May 2023, which advocates for retired people, claims that between January 2000 and February 2023 "COLAs increased benefits by 78%." The study goes on to state that the cost of goods and services bought by typical retirees in the same period increased by 141.4% and that Social Security benefits have lost 36% of buying power since 2000." Put in another way, a senior’s benefits would need an extra $516.70 each month ($6,200 more in 2023 than in 2000) than they are currently getting to maintain the same level of buying power as in 2000. This is over a period of 13 years. (Senior Citizens League. "2023 Social Security Loss of Buying Power Study," Pages 1 &2.)