Some advocates and politicians have been arguing for years that the current determinate of the Social Security COLA, the CPI-W is not an accurate reflection of inflation for older Americans. Legislation being promoted in Congress, the Social Security 2100 Act would switch to the now experimental CPI-E.
However, retirees should not get too excited, there is no guarantee this will produce higher COLAs and even if it does, past experience indicates the difference will be very modest.
CPI-E From From December 1982 through December 2011, the all-items CPI-E rose at an annual average rate of 3.1 percent, compared with increases of 2.9 percent for both the CPI-U and CPI-W. There are several reasons that older Americans faced slightly higher inflation rates over the past 29 years.
[For the average Social Security beneficiary this difference equals $2.80 per month]
First, older Americans devote a substantially larger share of their total budgets to medical care. The share of expenditures on medical care by the CPI-E population is roughly double that of either the CPI-U population or the CPI-W population. In addition, over the 1983–2011 period, medical care inflation increased significantly more than inflation for most other goods and services (5.1 percent annually for medical care, compared with 2.8 percent for all items less medical care).
Second, older Americans spend relatively more on shelter, and during the last 29 years shelter costs have modestly outpaced overall inflation. Although the CPI-E generally outpaced the official measures of inflation over the 1983–2011 timeframe, recent trends show different results. From 2006 to 2011, both the all-items CPI-E and the CPI-U rose at an average annual rate of 2.3 percent, while the CPI-W increased 2.4 percent. This turnaround was caused primarily by changes in the relative inflation rates of medical care and shelter, compared with the overall inflation rate.
Specifically, the gap between medical care inflation and overall inflation has generally fallen since 2005, and shelter inflation has been rising slightly more slowly than overall inflation over the 2006–2011 period. Source: Bureau of Labor Statistics.
So, while using the CPI-E may produce a higher COLA, it may not as well. Americans still need to save for their retirement.