The cost of living adjustment (COLA) for Social Security, designed to help retirees keep up with inflation, has seen volatility in recent years. Congress is considering changing how COLA is calculated, shifting from the current CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) to a new CPI-E (Consumer Price Index for the Elderly). This change would better reflect the spending patterns of seniors, particularly in areas like healthcare. If implemented, this adjustment could lead to more accurate and beneficial COLA increases for retirees.

Here’s How Congress Could Change Social Security COLA Adjustments

You can watch the full discussion with 24/7 Wall Street Analysts Eric Bleeker and Austin Smith above. We’ve also provided a summary of the discussion below:

• Automatic COLA adjustments were first used in 1975 and have been current law since
• COLA is relatively simple in that it tracks a measure called CPI-W 
• That is – the Consumer Price Index for Urban Wage Earners and Clerical Workers
• And every year, CPI from the third quarter applies to the current year
• So the large COLA adjustment in 2023 was indexed off third quarter CPI increases the prior year, for example
• Now that we have the mechanics of COLA out of the way, we can talk about the change Congress is studying
• The Congressional Research Services published data on May 24th that studied a new way to adjust COLA
• Specifically, their research was around creating a Consumer Price Index for the elderly
• So instead of using a CPI-W, COLA would adjust using a CPI-E going forward 
• When you think about it, this actually makes a lot of sense 
• Because right now, cost of living adjustments assume seniors shop the same way as urban workers – which simply isn’t true 
• Certain expense items like healthcare are going to be a lot higher for seniors 
• So, what were the results of this proposed change?
• The December CPI reading was 3.2% as currently calculated by CPI-W
• But if we applied the proposed CPI-E measure, it would have been 4.0% 
• As you can imagine, a .8% percentage point difference is very substantial for seniors!
• We’ll see if Congress turns this research into reality
• But it’s important to note – this isn’t a proposal for a “handout” of more money, it’s trying to be fair and giving seniors adjustments on what they actually spend money on
• The reality is, if healthcare costs were trailing broader price gains, CPI-E might come in lower. Yet, it would be more in line with senior spending 
• So we hope this is one law Congress actually takes action on

Transcript:

All right, Eric, we’ve spent a lot of time talking about Social Security and the cost of living adjustment or COLA for short.

It’s calculated each year and it serves as a simple purpose. It’s to help seniors living off of Social Security keep up with price increases and inflation.

But COLA is clearly a huge adjustment for retirees. And we’ve seen all sorts of volatility in COLA pricing the last few years.

And there’s recent news that Congress was looking at altering it. So how might COLA change in the years to come? What are we looking at here?

Yeah, cool. It’s clearly a huge adjustment for retirees. This has accelerated in recent years, as you mentioned, with the volatility around inflation.

So news that Congress was looking at alternate, it’s going to get a lot of attention. But blowing up the current format, might be a little more of a positive than retirees might expect.

So let’s run down the details. First of all, what is the background on COLA? Well, it was first used in 1975. It’s been the current law since and it relies on something that’s called CPI-W.

Now don’t let your eyes glaze over because this is really important because CPI-W is the Consumer Price Index for Urban Wage Earners and Clerical Workers.

And every year CPI from the third quarter is applied to the next year. So the big COLA adjustment, I believe it was 8.7% in 2023, that was indexed off the third quarter of the year prior.

Okay, so now that we got the mechanics of COLA out of the way, we can talk about what Congress is studying. The Congressional Research Service published data very recently on May 24th, and it studied a new way to adjust COLA.

Specifically, the research was around creating a consumer price index that’s explicitly for the elderly.

So instead of using CPI-W, COLA would adjust using CPI-E, Consumer Price Index for the Elderly going forward.

Now, Austin, when you think about this, it actually makes a ton of sense because right now, the way that seniors shop and spend their money isn’t similar to urban workers.

I mean, the expense that we would highlight is healthcare. A lot of senior expenses go towards healthcare, but it’s a relatively low amount of CPI if you’re using it for these urban workers.

So if you’re 62 or older and watching, you’re probably going to like what I’m about to say next. The December CPI reading was 3.2% as currently calculated.

Now, if you’re looking at the price of food and other things, you’re saying, I’m falling behind. That’s not a big enough adjustment.

But if we applied the same CPI-E measure, it would have been 4%.

So also, as you can imagine, a 0.8 percentage point difference is incredibly substantial. And we’ll see if Congress turns this research into reality.

But it’s important to note this isn’t a proposal to hand out more money. It’s trying to be fair and give seniors adjustments on what they actually spend, because the reality is, if health care costs were trailing broader price gains, CPI-E might come in lower, but it would be more in line with senior spending.

So the bottom line is this is one law I really hope Congress actually takes action on.

Yeah, I mean, fingers crossed that Congress does anything, but this really does feel to be the right change to make.

And hey, anytime people are messing with COLA or Social Security, it puts people on edge.

But this one does appear to be for seniors’ benefit.

As you pointed out, urban workers are going to have a much different consumption mix than seniors. Seniors are going to have higher health care costs.

We’ve also seen that seniors on average, food makes a much higher, consumes a higher percentage of their monthly expenditures, whereas urban workers have higher housing, transportation, and clothing costs.

This actually just seems like good sense. And for all the seniors watching this video, I certainly hope that Congress does what they have not demonstrated in the past, which is an ability to pass legislation.

But hey, let’s hope they take action here for your benefit.

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