Republicans Propose Reform to Social Security’s Cost of Living Adjustments Formula

According to the Huffington Post, Social Security adjusts benefits to keep pace with price increases. In the 1970s, Congress legislated yearly “cost of living adjustments” also known as COLA to regularize boosts to monthly benefits and provide predictable criteria for increasing Social Security benefits. COLA is an invaluable feature of Social Security. Unlike other programs, COLA provides sufficient numbers of participants and a long time horizon to balance out favorable and unfavorable periods of investment earnings and other variables.

Social Security COLA is calculated as the difference between the price of a market basket of goods and services typical of purchases by workers for the most recent year and the price of the same basket the year before. The percentage increase is then applied to each recipient’s benefit for the year started the following January.

COLA’s design however means that current benefits, adjusted for past price increases, will always lag behind current year prices which tend to increase. Fuel and food prices have been rising substantially, but COLA calculated in 2010 does not reflect current outrageous gas prices nor could offset them. COLA response to 2011 gas prices will boost benefits starting January 2012, when gas prices will most likely increase even further. Rarely do prices of goods go down, therefore COLA will always lag behind.

Some Republicans have proposed reducing COLA, claiming that the current method of calculating it overstates inflation. They argue that using the same market items each year ignores consumer substitutions of equal but lower cost items. Therefore, some Republicans have proposed what they call chained COLA, which would reduce the benefits under the current formula by an additional .03% every year. Some argue that such a method would affect people who depend Social Security benefits as the largest part of their income.



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