Is a New Way of Calculating the COLA Coming?

Mar 14, 2017

Legislation has been introduced, CPI-E Act of 2017, to change the COLA formula. Currently, the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) is used, but this new bill would use the CPI-E (Consumer Price Index for the Elderly). This change would make this calculation more accurate because the way the COLA is measured now looks at how inflation has impacted a wage earner, not the impact inflation has had on goods and services seniors rely on. More people are working because of normal economic growth and wages are increasing faster than cost of living increases for the elderly.

About COLAs

The 2017 COLA is 0.3 percent. It is calculated based on the rise in CPI from the third quarter of the current year (July through September) over the third quarter of the previous year. Richard Thissen, the president of the National Active and Retired Federal Employee Association said that in the past two years, the actual cost of living for seniors has increased by 2.7 percent (2.1 percent in 2016 and 0.6 percent in 2015) and this should’ve been reflected in the COLA’s.

Since oil prices drastically dropped, the rate of inflation has been flat.

The Labor Department uses the CPI to measure inflation or deflation nationwide monthly. The CPI is the measure of inflation and tracks the prices of goods. Each item has a “weight” in proportion to its importance in consumers buying habits. For example, housing has a higher weight than travel. The current CPI uses items that are more consistent with younger people, not seniors, who the cost applies to.

For the past 30 years, the CPI-E has risen about 0.2 percent more quickly than the existing measure. This new measure will always run higher and lead to more benefits, at least that’s the idea.

COLA’s are not raises. A COLA is there to protect the buying power of a senior’s benefit, which becomes fixed once they stop contributing to society.

How COLA’s affect Social Security

COLA’s are vital to Social Security, partly because personal pensions are not protected against inflation. For example, the senior who reaches 95 years old collects a private pension check that buys less than half of what he received when he was 66. As the level of dependency rises, the level of benefits falls. Medical care accounts for 7 percent of the current CPI figure, and of that, health insurance accounts for even less. This new bill is designed to ensure that the benefits of Social Security insurance keep pace with “real costs that seniors endure”, like prescriptions, medical services, and in-home care.

The proposed changes would extend beyond retirement benefits from Social Security. This would create a new COLA for those on disability, survivor’s benefits, federal retirement plans, veterans, and VA compensation for dependents.

COLA’s for Military Veterans

Military veterans may also get an automatic COLA if recently introduced bills become law. The Veteran’s Compensation COLA Act of 2017 would provide a COLA beginning December 1, 2017. The COLA would apply to:

  • Wartime disability compensation
  • Compensation for dependents
  • Clothing allowance
  • Dependency and indemnity compensation to surviving spouses
  • Dependency and indemnity compensation to children paid to wounded warriors and their families for injuries they suffered while serving

This legislation states that the COLA would be based on the same computation as Social Security.

The other bill is the American Heroes COLA Act of 2017. It would authorize the VA secretary to provide automatic annual COLA’s to these same categories without getting authorization from Congress. The current law requires Congress to pass legislation every year to increase rates of veteran disability compensation.

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