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Written by Pat Norton
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Tuesday, 11 March 2008 07:56 |
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Social Security’s annual cost-of-living-adjustment (COLA) for 2008 was a 2.3 percent increase in benefits. Since 1972, benefits are increased each January to maintain their purchasing power in real terms. Technically, each year’s COLA is given by the increase in an index called the CPI-W for urban wage earners. For administrative reasons, it is calibrated not to end-of-year or annual average changes, but to changes in price levels from the third quarter to the third quarter of each year.
As the first chart shows, this year’s 2.3 percent COLA failed to keep up with the rate of inflation for 2007. The standard measure, the Consumer Price Index for Urban households (or CPI-U) had an annual increase of 2.8 percent. Worse, an upsurge in energy prices in November drove the December-to-December rise in CPI-U to an unsettling 4.1 percent. This left the COLA unaffected, since it was based only on the price changes occurring through September.
Sometimes, as with the benefit increase for 2006, it works the other way around. That year, the COLA was .7 above the prior year’s inflation. It all depends on the timing of price increases through the year. If, as in 2007, energy costs spike toward the end of the year, the next year’s COLA will fail to keep up with inflation.
This temporary disparity may be one reason we are hearing more about “elder inflation” in recent months. Now as in the past, some observers contend that the prices seniors pay are rising faster than the officially measured rate of inflation. The reasoning is that seniors buy less of the items whose prices go down (computers, phones, and the like) and more of the things that are rapidly rising in price (notably including health care).
Unbeknownst to many, the Bureau of Labor Statistics has long compiled a cost-of-living index for people 62 and over, an “experimental” index it calls the CPI-E. The second chart draws on unpublished BLS data to compare annual rates of increase in this elder-index and in the standard measure, the annual rise in the CPI-U. It shows that over the 10 years since 1998, the CPI-E exceeded the standard measure in six years, while the CPI-U was higher in four years. In short, not a strong tendency either way.
However, if we compute the rise in the two indexes over the past 10 years, from 1997 to 2007, it is true that the elder index increased by 2.4 percentage points more than the standard rate of inflation. The elder index rose by 31.6 percent, relative to an increase in the CPI-U of 29.2 percent, using annual averages. The main reason, according to the BLS, is that elders spend nearly twice as much, on average, for health care, as the population at large. And health care costs rise faster than the general price level.
Rising health care costs, gas prices, food prices and commodities prices are putting pressure on millions of Americans who do not have the financial wherewithal to protect themselves from a general increase in prices. Some of these increases have been due to changes in underlying supply and demand conditions in the various markets, but no small part has been due to the insidious inflating activities of our federal government. Poor management of fiat currency forces even risk-averse individuals to participate in speculative activities in an attempt to protect their wealth. These activities may result in further wealth destruction.
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