Retirement & Financial Planning Report

Switching from the current consumer price index measure used to set COLAs in federal retirement, Social Security and some other benefits programs to a measure tailored to spending patterns of retirees wouldn’t necessarily result in larger annual inflation adjustments in those programs, a study has found.

Instead, it said, recent years have shown virtually no difference between the two and the 2021 inflation measure actually would have been smaller if the index tailored to retirees—called the CPI-E, had been used—instead of the broader index called the CPI-W that is used.

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The study by the Center for Retirement Research runs counter to the argument of retiree interest groups that the CPI-E should be used in those programs because cost growth is especially high in areas such health care that account a disproportionately large share of spending by retirees. The CPI-E gives them greater weight while giving lesser weight to expenses including transportation, tuition and child care.

The study said that over 1983-2021, the CPI-E’s average increase was 2.8 percent compared with 2.6 percent for the CPI-W. However, it said that almost all of that is due to the experience in the first half of that period, and that over the last 20 years, the difference was just 0.05 percent.

It said that over the first 20 years, medical care rose 2.6 percent faster than overall costs and transportation rose 0.8 percent slower. Over the last 20 years, it said, medical care costs were only 1.3 percent above average, while the cost of transportation changed from 0.8 percent below average to 0.2 percent above.

“The old relationship between the two indexes appears to have changed. In fact, if the 2022 COLA had been based on the CPI-E, it would have been 4.8 percent rather than the actual 5.9 percent,” it said, largely due to medical prices being virtually unchanged—up just 0.4 percent.

“The extremely low rate of medical care inflation in the last year clearly reflected the low usage of doctor and hospital visits by the population as a whole during the pandemic and is unlikely to be repeated. But if the rate of medical care inflation continues to be held in check, as it has for the last two decades, then the argument for using the CPI-E weakens,” it said.

It added: “Moreover, the CPI-E is not a real price index. It simply reweights the data collected for the population as a whole. Thus, if the decision were made to employ an index for the elderly, a new index would be needed with a larger sample of older households that relies on the prices for products they buy at places they shop.”

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