Triggers State/Teachers’ and Local COLAs
MARCH 2014 VOICE: For some time, we’ve seen where the formula for calculating Social Security COLA (Cost-of-Living-Adjustment) benefits has been under attack as being too generous. Now there is push back against this criticism, with calls by some officials, most notably our senior US Senator Elizabeth Warren, to improve Social Security’s COLA.
Triggers State/Teachers’ and Local COLAs
MARCH 2014 VOICE: For some time, we’ve seen where the formula for calculating Social Security COLA (Cost-of-Living-Adjustment) benefits has been under attack as being too generous. Now there is push back against this criticism, with calls by some officials, most notably our senior US Senator Elizabeth Warren, to improve Social Security’s COLA.
“Three years ago, we reported that a special study commission on the federal debt and budget, commonly referred to Simpson Bowles, was recommending a different formula for calculating Social Security’s COLA,” according to Voice Publisher Nancy Delaney. “Their proposal called for changing a major component of the current formula, namely the Consumer Price Index or CPI which analyzes the prices being paid by consumers for goods and services and measures the rate of inflation.
“We’ve kept a close eye on this issue because state/teachers’, as well as local, COLAs are triggered by Social Security’s announcement of its COLA. Not only this, the Social Security benefits, received by many members, are already reduced by the federal Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) laws, and they don’t need to be hurt anymore with even less (COLA) benefits.”
Under the current Social Security COLA formula, the CPI-W (Urban Wage Earners and Clerical Workers) is used in the calculation. If the average CPI-W for a calendar year’s third quarter (July – September) exceeds the prior year’s third quarter, then a COLA will be paid by Social Security.
For example, last year’s third quarter (July-September 2013) exceeded 2012’s third quarter by 1.5%. Members, who are also receiving Social Security, have seen their benefits adjusted by just that percentage – 1.5%.
Critics argue that the current formula, applying the CPI-W, is artificially too high since it doesn’t factor in that consumers will substitute a cheaper good or service for the ones that have gone up in price. Instead, they propose a different CPI, commonly called the Chained CPI for Urban Consumers or C-CPI-U, which takes into account the substitution of cheaper goods or services.
“We’ve written about the Chained CPI in several articles over the years, most recently in last year’s March Voice,” continues Delaney. “And as we pointed out then, there’s no dispute that the Chained CPI would produce smaller COLAs for Social Security.
“It’s been estimated at 0.3% less. That means that this year’s 1.5% increase in Social Security would have been 1.2%, and over one’s retirement years, the reduction starts to add up.”
CPI-E: Proposed Retiree Index
Finally, the focus of the debate over Social Security’s COLA may be taking a dramatic shift away from reducing the COLA to actually improving it. This shift can be attributed to calls that the Social Security COLA formula adopt a CPI for those 62 year of age or older or CPI-E (Elderly).
Proponents of the CPI-E contend that the CPI-W or other traditional inflation measures, such as the CPI-U (Urban consumers) which produces an estimate of inflation (increase in prices) similar to the CIP-W, do not accurately reflect the heavy reliance of retirees on certain goods and services, for example health care. Therefore, they say, you need a specific CPI that does and the CPI-E fits the bill.
Since 1982, the federal Bureau of Labor Statistics (BLS) has been computing the CPI-E. According to the Congressional Budget Office (CBO), the CPI-E has been 0.2% higher than the CPI-W or CPI-U. Ed Note: The CBO points out that while the CPI-E has been higher since 1982, it has been generally lower since December 2007.
“Back in an earlier issue (of the Voice), I explained how the Social Security COLA is calculated and also raised concerns about the Chained CPI,” comments Association official Jerry Coughlin. “Recently BLS prepared a chart that shows how a hypothetical retiree, who started to collect Social Security in 2001, would be affected by the Chained CPI and the CPI-E.
“While the Chained would take away $869 in annual benefits today, the CPI-E adds another $56. That’s a significant difference of $925 or $77 monthly.”
Sen. Warren: Leading Voice Against Chained CP
As we reported earlier, our U.S. Senator Elizabeth Warren has taken a lead role nationally in defending Social Security against the attacks on the system. She has come out forcefully against the Chained CPI.
“We applaud the Senator for her strong stand against any further reductions in Social Security,” Association President Frank Valeri says. “Along with our push for WEP/GPO reform, we need to assert a more positive approach toward improving retirement and not allow the debate to simply focus on cutting benefits. And that’s what we see here with Senator Warren.”
In response to President Valeri’s recognition of the Senator’s active support, Senator Warren states that,”There is a retirement crisis as real and frightening as any policy problem facing our country today. Yet Social Security has been under attack. Benefits have already been chipped away by WEP and GPO laws, and now some have suggested further chipping away at people’s modest benefits with Chained CPI.
“Right now we should be talking about strengthening and expanding Social Security – not slashing benefits and squeezing our retirees. Your members worked hard as public servants, and have greatly contributed to our quality of life here in the Commonwealth.
“I’m focused as Senator on doing everything I can to protect critical Social Security and pension benefits to ensure all American workers can retire with dignity.”
Ed Note: Senator Warren is one of the first to cosponsor S896, which repeals the WEP and GPO laws. See September Voice. At press time, S896 has 16 Senate cosponsors, and the House companion bill (H1795) is cosponsored by 109 Congressmen.