What is the Consumer Price Index (CPI) and how does it affect Social Security benefits?
Inflation can chew into the purchasing power of those who live on a fixed income. The CPI is used to keep Social Security benefits from being eroded.
The US Bureau of Labor Statistics monitors the rise and fall of prices by measuring them in a weighted basket of goods and services, called the Consumer Price Index. This information is useful for policymakers to make decisions to control inflation or deflation.
It is also used to index payments to Social Security beneficiaries so that inflation doesn’t erode the purchasing power that a rise in the cost of living would imply. Every October the Social Security Administration announces the Cost-of-Living-Adjustment (COLA) for the following year that will be used to modify the level of benefits recipients will receive.
How does the Consumer Price Index work?
The US Bureau of Labor Statistics scrutinizes a range of goods and services that urban consumers spend their money on. The agency formulates different Consumer Price Indices to look at the economy from various perspectives. To estimate the Cost-of-Living-Adjustment, the Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) which specifically tracks retail prices as they affect urban hourly wage earners and clerical workers, representing roughly 32 percent of the population according to the US Bureau of Labor Statistics.
Food, apparel and transportation costs and some other retail goods and services have slightly more weight in the calculation than housing, medical care and recreation in the CPI-W. Other indices look at different portions of the economy or sections of the population, for example the CPI-W is a subset of the CPI-U which looks at all urban consumers and encompasses around 87 percent of the population. The CPI-W, like the other CPIs, is measured on a monthly basis looking at the change for the same month from the previous year.
The economic recovery from the pandemic has triggered rising prices for a wide range of goods and services, and that's expected to translate to bigger checks for retirees. https://t.co/lP7ZJzBUew— NBCWashington (@nbcwashington) October 13, 2021
It’s argued that this is not an accurate measure for determining the COLA causing an overestimation of the annual increase to benefits. A bulletin from the Social Security Administration lays out what effect different Consumer Price Index measurements would have on benefits and the solvency of the Trust Funds that are part of how benefits are financed.
How is the CPI used to calculate the COLA?
As mentioned before, the increase in the annual COLA is calculated using the CPI-W, but the Social Security Administration only uses the third quarter of each year to calculate the COLA. Comparing the year-on-year change of the three months in the third quarter, July, August and September, the agency formulates how much benefits will be increased for the next year. The COLA is applied to payments beginning in January of the following year. However the first payments for the next year go out at the end of the year in which the COLA is calculated.
Rising inflation is expected to lead to a sizeable increase in Social Security’s annual cost-of-living adjustment, or #COLA, for 2022. Exactly how much will be revealed Wednesday morning.— TribLIVE.com (@TribLIVE) October 13, 2021
The US Bureau of Labor Statistics releases the Consumer Price Index data for September the second week of October. This year the agency will release the data 13 October at 8:30 am ET. If the Social Security Administration follows the pattern of last year, beneficiaries will know what the COLA 2022 will be the same day some time after the September 2021 data is released. However, those who don’t wish to be waiting around for the announcement can get the news sent directly to them.
Since December 2020, the Social Security Administration has made it easier for beneficiaries to receive information about the COLA. Those who use the My Social Security online service can sign up to receive a message regarding the change in COLA. To receive free notifications from the Social Security Administration, log into your account and under “Message Center Preferences” you can choose to receive an email or text with the latest information.
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