In the latest round of negotiations involving the budget and deficit issues, Congress made no decisions regarding changing the consumer price index (CPI) used to calculate the cost of living adjustment (COLA) for Social Security old age benefits and disability insurance (SSDI). The COLA is very important for seniors and the disabled who rely on those benefits, as it prevent inflation from eating away at the value of the benefit.
There is more than one CPI and some have suggested that a “chained CPI” should be used. With a chained CPI, calculations are made to adjust the rate for substitutions that consumers allegedly make when the price of some goods increase.
When beef prices rise, consumers shift their purchases to substitute goods, like chicken or pork, so the inflation rate they experience is less than if they were buying the more expensive beef.
For SSDI beneficiaries, the problem with the chained CPI is that it is not tied to the kind of expenses they actually incur. It does not capture the rising cost of medical services and drugs, which increase much faster than the general inflation rate.
In fact, the Bureau of Labor Statistics, the government agency responsible for the CPI, has a CPI tailored to seniors that does account more accurately for increases in healthcare expenses. However, this CPI would result in a larger COLA for Social Security beneficiaries, so it unlikely that Congress will choose to use it.
Source: Slate.com, “CPI Unchained,” Matthew Yglesias, December 30, 2012