Social Security Statistics Don’t Always Reflect Economic Reality

The Social Security Administration has advised recipients that there will be no cost-of-living adjustment to their benefits in 2016.

The news was a bit puzzling to retirees, many of whom are wrestling with significant price increases in key items in their budget - rent and medical care as just two examples. Their puzzlement undoubtedly increased with the appearance of bogus reports that while they would not receive a cost-of-living adjustment, Congress would. In fact, by law Members of Congress are eligible to receive annual cost-of-living pay adjustments - unless they vote to turn them down, as they have in recent years – but they would get the same increase as Social Security beneficiaries, zero in 2016.

That's not to say that different groups cannot receive different inflation adjustments in their checks. But don't we all have to deal with the cost of living?

The answer is in the statistics, and since the United Nations designated October 20 as World Statistics Day 2015, if we're not exhausted from the associated revelry this would be a good time to look at how we collect and use numbers to support and implement economic policies.

To start with, like so much in economics, it is not as simple as we would like. We have to accept the fact that there is no such thing as the inflation rate. Instead, there are lots of inflation rates, for different products and for different areas. The purpose of a cost-of-living adjustment is to soften the impact of inflation – price increases – but the cost of living varies widely, depending on where people live, their age, and their income and how they earn and spend it.

The simplest answer to the difference between groups – Congress and retirees, for example, – is that Members of Congress are still wage earners while most retirees are not, and there is a difference in their spending patterns.

The Bureau of Labor Statistics collects, sorts, analyzes, and publishes oceans of statistics on prices and summarizes them for use in making economic decisions.

To gauge the impact of a price change for a particular item, we have to know how important that item is to consumers. A 50 percent increase in the price of diamonds, for example, would have a smaller impact on most people than a 50 percent increase in the price of gasoline – because diamonds do not typically represent a big portion of most people's monthly budgets.

To calculate the proportions, BLS uses a "market basket" to summarize what people actually spend their money on. They are converted into "weights" that are used to calculate the net effect of price increases and price declines for individual and groups of products and services in a given month.

These market baskets can be quite different for different cities and regions within the United States, and the BLS monthly report on Consumer Price Index is an average that represents all of us as consumers. The CPI that is used to calculate changes for Social Security recipients, and Congress, is the CPI-W, which is the price index for "urban wage earners and clerical workers."

Most people were aware that the average Social Security recipient does not have the same spending patterns as the average wage earner. Since the mid-1990s, the BLS has been calculating a CPI for retirees. It is designated CPI-E, for experimental, and could be very helpful in adjusting Social Security benefits for the effects of inflation.

The CPI for retirees is not yet published because the BLS does not believe that it is quite ready for prime time. There are still some remaining technical issues with the weights assigned and the prices gathered for this study – but it is still useful.

The current data in that CPI-E, for example shows that prices for the retirees market basket rose higher than those for wage-earners and for the average urban consumer. Because inflation generally has been more modest than in most economic recoveries, though, if we used CPI-E to calculate a cost-of-living increase the average Social Security recipient would see only a very small increase in monthly benefits.

Still, even small increases are important to fixed-income retirees and the gap between inflation's effects on retired people and wage-earners will probably get worse. The realities of medical care costs and the upward pressures on urban rents will insure that retirees will find it more and more difficult to stretch their money to meet their living costs.

From either an accuracy or a fairness standpoint there is no doubt that Congress should take action to begin shifting Social Security benefits adjustments to a price index that is more faithful to the reality of the recipients' budgets. Whether that is possible from a political or budgetary standpoint is another matter.

James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.