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How Social Security Cost of Living Adjustment (COLA) Is Calculated Is a Complete Joke

This is a syndicated repost published with the permission of Money Morning - We Make Investing Profitable. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

The U.S. Social Security Administration (SSA) assesses a Cost Of Living Adjustment (COLA) to beneficiaries each fiscal year. The idea is to make sure money going to seniors keeps pace with rising costs.

But there is a massive problem with the way COLA is calculated – just look at these numbers…

U.S. seniors have seen a 74% increase in expenses since 2000, according to The Senior Citizens League (TSCL) on Sept. 30. Meanwhile, the COLA has increased benefits just 43% across the same time period.

TSCL’s review showed that average Social Security benefits in 2000 were $816 per month, and $1,166.30 by 2015. However, the study found that “just to maintain the same buying power they had when they first retired,” beneficiaries should have received an average of $1,419.00 per month in 2015.

It’s getting worse. On Thursday, this gap between cost of living increases and lack of COLAs widened. The SSA announced there will be no COLA to beneficiaries in fiscal 2016. This marks the third time in six years COLA has flat lined.

The problem is that how COLA is calculated is a complete joke when it comes to actually adjusting to account for seniors’ cost of living increases.

Let’s take a look at the “official government math”…

How COLA Is Calculated

Here’s how COLA is calculated per the SSA’s official website:
How is a COLA calculated?
The Social Security Act specifies a formula for determining each COLA. According to the formula, COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics.

In other words, the U.S. Labor Department assesses inflation specifically using a subset of the CPI called the CPI-W.

The data used to calculate the CPI-W comes from “urban consumers” that derive “more than one-half of the household’s income from clerical or wage occupations.” Additionally, “at least one of the household’s earners must have been employed for at least 37 weeks during the previous 12 months.”

That means there are two glaring problems that flow from using the CPI-W to calculate inflation for the purposes of a Social Security benefits increase…

First, “the CPI-W population represents about 32% of the total U.S. population,” according to the Bureau of Labor Statistics.

Second, that 32% it represents are in a younger demographic than the elderly receiving Social Security benefits. They are wage earners active in the work force.

Cost increases that hurt seniors are usually much different than those that hit the younger population…

How COLA Is Calculated: Failure to Account for the Elderly

The government last week cited low gas prices as the primary reason for no COLA in fiscal 2016.

While it’s true gas prices fell 23% year to date (which lowers the cost of living for active American drivers), U.S. seniors see little benefit from low gas prices – only about 12% of licensed drivers are age 70 and above. Seniors’ monthly expenses aren’t going toward gas or any car-related costs.

How COLA is calculated

What does affect Social Security beneficiaries’ cost of living is healthcare inflation.

Older people are much more likely to be among the top-spending percentiles for healthcare.

“The elderly (age 65 and over) made up around 13% of the U.S. population in 2002, but they consumed 36% of total U.S. personal health care expenses,” according to the Agency for Healthcare Research and Quality. “The average health care expense in 2002 was $11,089 per year for elderly people but only $3,352 per year for working-age people (ages 19-64).”

How COLA is calculated

That means the elderly are far more affected than younger demographics by rising healthcare costs – and rising they are…

According to data published in BMJ on Aug. 3 by the Office of the Actuary at the Centers for Medicare and Medical Services (CMS), spending on healthcare is expected to grow at an average annual clip of 5.8% over the next decade. And according to the U.S. Bureau of Labor Statistics, medical prices rose 0.7% this summer alone – the “largest increase since January 2007.”

“The real inflation in the cost of medical care hasn’t fully flowed into the price of insurance or the measures of total spending, despite the recent increase in these other figures,” Forbes contributor and public health policy expert Scott Gottlieb, MD, wrote on Aug. 6. “There is still a lot of room to run. If the increases in the price of medical services continue, and medical demand gets back to historical norms, total spending on healthcare can start to rise even more quickly.”

Medical costs are included in the CPI-W measure, but for a population that spends roughly one-third as much on healthcare as seniors do.

Advocates that want to change how COLA is calculated suggest switching from the CPI-W to the CPI-E (Experimental Price Index for the Elderly). It calculates CPI based on the spending habits of Americans 62 years of age and older.

But CPI-E opponents argue that the purchasing population measured in the index is not necessarily identical to the Social Security beneficiary population either. More than one-fifth of Social Security beneficiaries are under age 62. Likewise, more than one-fifth of individuals aged 62 or older are not beneficiaries, but they are included in the CPI-E population.

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The post How COLA Is Calculated Is a Complete Joke appeared first on Money Morning. Reposted with permission.

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