For several years, advocates for retirees have argued that the formula used to calculate Cost of Living Adjustments (COLAs) does not accurately measure living expenses for the majority of seniors. The biggest point of contention is that Americans 65 and older spend approximately twice as much on healthcare-related expenses than younger people.
For example, according to the US Department of Health and Human Services, from January 2022 to January 2023, more than 4,200 prescription drugs had price increases and nearly 50% of these increases were higher than the overall rate of inflation. As a result, seniors have suffered an ever-increasing erosion of purchasing power due to healthcare inflation when compared to younger, healthier workers.
How COLAs Are Usually Calculated
The Department of Labor’s Bureau of Labor Statistics (BLS) calculates the COLA by comparing the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for July, August, and September of the current year, to the average CPI-W for the previous year. That percentage change becomes the amount of the annual COLA for Social Security and federal pension payments.
The Consumer Price Index for the Elderly (CPI-E)
Advocates for retirees have argued that the Consumer Price Index for the Elderly (CPI-E) provides a more accurate weighted average of price changes for Americans age 62 and older. According to a Congressional Research Service report, in most years, the CPI-E is indeed higher than the CPI-W. For example, the COLA for 2024 would have been 4% instead of 3.2% if calculated with the CPI-E. This would’ve increased the average Social Security benefit from$1,907 to $1,922. When you’re retired and living on a fixed income, every COLA percentage point counts.
“With seniors spending more on prescription drugs in addition to healthcare services that are not covered by insurance, it’s important to have a financial strategy to help mitigate these costs.”
Boosting Benefits and COLAs For Seniors Act (S-3974)
The Boosting Benefits and COLAs For Seniors Act (S-3974) proposes using the CPI-E to calculate COLAs for Social Security. Of course, this would also extend to COLAs for FERS, CSRS, and disability benefits. Introduced to Congress in March of 2024, it will likely go into committee before the House and Senate vote on the bill.
With seniors spending more on prescription drugs in addition to healthcare services that are not covered by insurance, it’s important to have a financial strategy to help mitigate these costs. Otherwise, you may find yourself burning through your Thrift Savings Plan (TSP) at a faster rate and end up outliving your nest egg.
To learn more, meet with an FRC® trained advisor who can help you inflation-proof your retirement income.
