The COLA Conundrum
Annual COLAs became a permanent part of Social Security in the 1972 Amendments. While crafting the rules, Congress selected a common, reliable, repeatable baseline to determine an annual COLA. The best alternative was the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers, known as the CPI-W.
But it's not a perfect fit to determine costs for older Americans. One group of economists believes CPI-W overstates inflation. Another group thinks it understates inflation. Some prefer the Consumer Price Index for All Urban Consumers, or the CPI-U.
Others want to implement the CPI-E (E for Elderly) that tracks spending on goods and services used by those 62 and older. But the CPI-E does not represent all Social Security beneficiaries:
- Six million beneficiaries are survivors, including young mothers and their children.
- 10 million are younger disabled folks.
- A large percentage of folks 62 and older are not retired.
So, we have a COLA conundrum.
Let's Not Split Hairs
At the core of the matter shouldn't be which Consumer Price Index to use as the benchmark. There are pros and cons to each. The real issue is that the annual increase is simply too small to cover retirees' actual rising grocery bills and health care expenses.
Clients who retired in 2008 — 15 years ago — have seen an increase of 43% in their monthly gross Social Security benefits, based on CPI-W.
An initial monthly payment of $2,212 in 2008 is now $3,171, according to a Social Security analysis. That's a $959 increase in monthly payments over 15 years, or $64 per month. Cash flow is the real problem.
Retirees Need More Than Social Security's COLA
Social Security was never intended to be a retiree's only income source. There are many other dots to connect to help clients address rising costs over a long retirement. These strategies can help clients understand how they can plan for and successfully handle never-ending rising costs:
- Discuss how their portfolio, and not Social Security, must do the lion's share to address rising costs. Investments aiming for growth are needed to offset higher prices.
- Factor in Medicare Part B premiums properly. When Social Security benefits rise, so does the Part B premium. Make sure cash flow outlooks include faster-than-average rising Part B premiums.
- Send out annual reminders to reassess Part D drug plans and costs of drugs. They can change dramatically, without any notice, and it's up to each client to stay on top of price changes and find savings.
- Discuss the client's role in periods of high inflation. If they feel pressure on their resources, help them find places to cut back and make tradeoffs.
Blaming Social Security's COLA for not delivering a substantially higher income each year is not a winning position. The goal is to deliver more cash to buy groceries. That's a key role of a retiree's portfolio.
Marcia Mantell is the founder and president of Mantell Retirement Consulting Inc., a retirement business and education company supporting the financial services industry, advisors and their clients. She is author of "What's the Deal with Retirement Planning for Women?," "What's the Deal with Social Security for Women?," "Cookin' Up Your Retirement Plan," and blogs at BoomerRetirementBriefs.com.
