The COLA debate

In the fiscal-cliff discussions, there was a proposal to change the cost-of-living-adjustment formula for Social Security. It wasn’t adopted. N.C. State University economist Mike Walden explains what that was about.

“Well, for the last 40 years, one of the benefits of receiving Social Security is that you were assured if you were a recipient that your payments, which you get from the Social Security system as a retiree, would go up each year based on the rise in the cost of living. Now, this rise in the cost of living was based on something called the consumer price index. That’s something that we typically hear about. And what the consumer price index is based on is the government goes out and they say, first of all, what is it that people buy, and then they track the prices of those things that people buy and change them.

“Now, one of the criticisms of the standard consumer price index … is then that market basket of things that you and I buy, the government doesn’t change them very frequently. So they become out of date. Therefore, there’s been an alternative new CPI developed called the chain CPI, and it does take account of people’s changes in purchases.

“Now where I’m getting with this is that if you track the increases in the cost of living by the standard CPI compared to the increases in the cost of living by this new chain CPI, the chain CPI shows costs going up less. And so what the proposal was was to shift how Social Security payments are changed over time to this new more modest chain CPI, and that would have meant down the road, Social Security recipients would have seen less increases in their payments — what they receive — and therefore Social Security would save money.

“So, this was the debate. You can argue on economic grounds maybe it would be good to go to that other system. Of course, others would say, no, this means retirees are going to get less money. And so it was put on the shelf and was not adopted. But I do predict that we will see this debate revisited down the road.”