A congressman is attempting to create federal retirement benefit increases. The proposal offers the new calculation using CPI-E vs. CPI-W. Using CPI- U instead of CPI-W is also being proposed. It is not clear whether the Congress would even nod to change the way cost of living adjustments are being calculated. Even experts are hesitant about speculating on which way the wind will sway. If the method of calculation is changed, many people will need the help of someone who serves as a retirement guide.
Request for Change in Calculating Retirement Benefit Increases
The request for making a change in calculating retirement benefit increases was proposed by Congressman John Garamendi (D-Modesto, CA). Garamendi recently introduced the CPI-E Act of 2017 (H.R. 1251), a bill that would require the Cost of Living Adjustment (COLA) methodology to make use of CPI-E instead of the CPI-W. CPI-W is currently being used to calculate changes in retiree benefits for Social Security recipients and federal annuities provided under the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS).
Talking about the proposed change in calculating retirement benefit increases, the president of National Active and Retired Federal Employees Association, Richard Thissen stated that the fact that it is already not being done is shocking. The COLAs are based on the costs experienced by clerical workers and urban wage earners rather than the costs experienced by elderly individuals.
It should be mentioned here that the retirees started getting calculating retirement benefits increase or Cost of Living Adjustments (COLAs), in 1975 only. Congress approved the automatic cost-of-living adjustments as part of 1972 Social Security Amendments. At that time only one Consumer Price Index was available, it was CPI-W. Before 1975, the retirement benefits were increased only when the Congress enacted a special legislation.
Experimental Price Index for the Elderly
The Bureau of Labor Statistics has expanded the number of CPIs since the 1970s, and it has created an experimental inflation measure which is known as Experimental Price Index for the Elderly. It is the responsibility of the Bureau of Labor Statistics to produce the Consumer Price Index.
CPI-W, on the other hand, measures the changes in prices for a market basket of services and goods bought by a household where more than half of the income of the household must come from wage or clerical occupations. The CPI-W population represents about 28 percent of the total U.S. population.
At present, the experimental CPI-E is calculated by using the households that include at least one reference person or spouse who is at least 62 years of age. It represents about 19 percent of the current CPI sample.
BLS has found that around four in seven major expenditure groups that are being measured by CPI older households are assigning a larger portion of their total expenditures to some categories that are rising rapidly like the medical care costs.
The Costs Involved
If the Congress approves a change on calculating retirement benefits increases and switches to CPI-E, it would cost several million dollars. The index sample will need to be expanded so that it becomes statistically defensible. BLS will also need to put greater resources into collecting information regarding senior discounts that have the potential to affect the final pricing of various goods and services.
Chained Consumer Price Index for All Urban Consumers
A few members of the Congress are also considering switching to Chained Consumer Price Index for All Urban Consumers (C-CPI-U) from CPI-W. It is believed that (C-CPI-U) will capture consumer expenditure substitutions so as to reflect true cost-of-living changes of the customers. On the BLS website, an example of consumer preferences between pork and beef can be found.
Beef and pork are two separate CPI item categories. If the price of pork increases and the price of beef do not, consumers might switch to beef from pork. The C-CPI-U is designed in such a manner that it accounts for this kind of consumer substitution between different CPI item categories. In this example, the C-CPI-U will increase but not by as much as the index that was based on the fixed purchase patterns.
Thus, the C-CPI-U is proven to increase at a slower rate than the CPI-E or CPI-W over the last decade which would save government’s money by lowering the amount by which retiree benefits increase.
An act known as the CPI-E Act of 2015 was similar to the bill that has been introduced by Congressman Garamendi. It died in a Subcommittee of the House during November 2015.
Though the efforts made by Congressman Garamendi to change retirement benefit increases are calculated in the future to have got some attention, no one can say for sure whether the proposed changes will be approved by the Congress this year, or ever. If the changes are approved, the process of calculating cost of living adjustments will change, and most retired people would need the advice of a federal retirement guide for managing their finances well.