How is social security increases calculated

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Now Reading:. Membership My Account. Rewards for Good. Share with facebook. The league says the costs that are growing the most quickly are for prescription drugs, which cost percent more in than in In , the league issued a white paper arguing that the government had raided the Social Security trust fund and offset some of the effects by having the Bureau of Labor Statistics manipulate its calculation of the CPI. Health care financing analyst Kristanna H.

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This could be the worst market for a first-time homebuyer, experts say Here are some smart financial moves for new parents Student loan forgiven? But the size of the increase will vary by beneficiary. This chain-weighted CPI reduces substitution bias by changing the expenditure weights each month rather than biennially, as is done for the other nonchained consumer price indexes.

In this way, the chain-weighted CPI better accounts for changing purchasing habits. Because the C-CPI-U relies on expenditure data that is available only after a significant time lag, its values are not final when first published. Final values for the C-CPI-U are not published until up to 2 years after the initial values are published. The treatment of medical care is particularly complicated when measuring inflation, and a number of important issues need to be considered.

The medical component of the CPI has several issues inherent to the goods and services it covers that other components may not. For example, medical technology is constantly changing. Graboyes outlines some of the issues that make measurement of medical prices complex: the introduction of treatment for a previously untreatable condition, changes in treatments, preventive measures like vaccination, and changes in efficacy of treatment.

The segment of the medical CPI that covers hospital expenditures has a couple of issues. Because Medicare Part A coverage is nearly universal for persons aged 65 or older, the price changes calculated on transactions by private payors in the hospital segment are not representative of the hospital expenses for the elderly. The second issue is one of quality change that has partially been addressed. Many medical procedures have decreased the number or intensity of inputs necessary to achieve a particular outcome, from shortening the length of stay to diminished intensive nursing needs following less invasive surgeries.

Instead of pricing individual inputs, like hospital room days, the pricing unit as of January is the hospital visit Bureau of Labor Statistics and The opinion that medical services should be viewed in light of treatment outcomes has been gaining prominence Bureau of Labor Statistics Another related issue is that as doctors become more adept at new procedures their success rates rise, improving outcomes, but pricing the input of a hospital visit does not capture this.

House, office, clinical, and hospital visits billed by private-practice medical professionals with an MD except ophthalmologists are included in this stratum. This stratum index uses transaction prices and includes Medicare Part B payments in addition to payments by private payors Bureau of Labor Statistics Prior to publication of the January CPI , the BLS did not substitute generic drugs unless the brand name drug was no longer carried by a retail outlet.

Since January , however, a brand name drug may be substituted for by a therapeutically-equivalent drug 6 months after it loses patent protection. The 6-month period allows the new therapeutically equivalent drug to gain market share, and then the chance of selection for the sample is determined by the proportion of sales of each version.

The recent enactment of a prescription drug benefit for Medicare beneficiaries Part D introduces another complicating factor in measuring effective price changes faced by the elderly.

The impact of Medicare Part D on the inflation experience of the elderly is not yet clear, nor is the effectiveness of the CPI-E in capturing this experience. The CPI indirectly factors price changes of medical insurance into three parts. The first part encompasses most of the expenditure for health insurance reflecting insurers' payments for medical treatment.

The CPI allocates this segment to the indexes for those treatments. The remaining weight, comprising the unpublished health insurance index, reflects changes in the cost of administering policies and maintaining reserves and profits Bureau of Labor Statistics The CPI considers employer-paid health insurance premiums to be part of the consumers' incomes and not their expenditures, and as such, does not include them in the CPI Bureau of Labor Statistics This presents a difficulty for two reasons.

The first is best illustrated by an example: suppose a potential employee can choose between two jobs that are identical, with the exception that one offers a health insurance benefit and the other does not, with the salary differential equal to the employer-paid premium.

If the employee chooses the job with the health insurance benefit, he has essentially chosen to expend that part of his pay on health insurance:. The second reason is that, all else equal, a change in the employee-employer relationship could appear as a price change. Suppose the total employee-employer insurance premium remains unchanged, but the employer decides to pay a smaller portion of the premium. This is a decrease in the employee's compensation, but because the employee's share of the premium increases, it also appears as a price increase in the CPI.

In this case, the employer has reduced the employee's compensation, but the price the health insurance company receives for the policy remained unchanged. In addition to the limitations of all CPI indices described in the preceding sections, the experimental CPI-E has several additional technical limitations. Only There are additional concerns with using the CPI-E as a measure of the inflation experience of the elderly. While the expenditure weights vary by CPI population group, the price changes within the expenditure categories and classes are based upon the purchases of the entire CPI-U population.

Because the purchasing patterns of the elderly may differ from those of the general urban population in ways not captured by the expenditure weights, the CPI-E may mismeasure the inflation experience of the elderly. In other words, the elderly may differ from other groups not only in what they spend their money on, but in how and where they shop and in the prices they may pay.

The direction of the mismeasurement is not always clear however, and may differ from one expenditure category to another, or even within the category. The medical expenditure category is a prime example of how the elderly may differ in the composition of their within-category expenditures.

Berndt and others describe scenarios in which the elderly may be prescribed drugs that would experience faster or slower growth in prices. For acute conditions, the elderly may be more medically fragile and be prescribed the newest drugs with the fewest side effects; for chronic conditions, physicians may not want to switch their elderly patients from the older drugs that they are taking and are working well. The elderly would experience faster price growth in the first case but slower in the second.

Hospital costs are another area in which the CPI-E may not reflect the experience of the elderly. As mentioned previously, Medicare Part A transactions are not included in the CPI , thereby excluding a substantial number of transactions involving the elderly. Housing is another area in which there is uncertainty about how the out-of-pocket expenses of the elderly match the estimate in the CPI-E.

Over 80 percent of housing units occupied by householders aged 65 or older were owner occupied in , compared with nearly 66 percent of nonelderly householders U. As mentioned previously, the majority of elderly own their homes free and clear and do not have rental or mortgage payments, making their out-of-pocket homeownership costs smaller.

If the objective of a COLA is to protect the purchasing power of the elderly, it is not clear that use of rental rate equivalence will accomplish that, since it measures consumption of housing services rather than out-of-pocket expenditures. The retail outlets frequented by the elderly population may also differ from those utilized by the general urban population. The retail outlets from which prices are sampled by the BLS are randomly, but relatively uniformly, selected to represent the outlets where purchases are made by households in 87 geographic regions from across the entire United States, while the elderly U.

Furthermore, the elderly may be less likely to make purchases over the internet or at warehouse clubs than the general urban population. They may also have more physical limitations that would lead them to make purchases through mail order. Berndt and others indicate that data made available to them from one mail-order firm shows that more than half of the prescriptions it dispensed were to customers aged 65 or older.

Because the sampling of retail outlets, from which price changes are determined, is based upon the purchases of the entire urban population, this also can lead the CPI-E to mismeasure the inflation experience of the elderly.

While the issues discussed here and many others are easily identifiable, they are often difficult to analyze fully. In many cases the direction of change attributable to an issue is not even clear. For example, while the concentration of elderly in a small number of states is known, it is not known whether these states experience rates of inflation that are higher or lower than the national average.

Many elderly choose to live in Florida, but while the BLS does compute separate price indices for major metropolitan areas, it does not compute cost indices by state. For example, during the second half of , Miami experienced inflation higher than the national average while Tampa- St. Petersburg experienced lower inflation Bureau of Labor Statistics , Table Whether the elderly experience higher or lower rates of inflation as a result of their geographical concentrations remains an open question.

Similarly, the impact of differential use of retail outlets is difficult to assess. While the conventional wisdom may be that the elderly are less likely to make purchases over the internet or from warehouse clubs, it is also true that the elderly may have a lower opportunity cost of time.

Because the elderly may have more time to spend searching for the best deal, they may make purchases at or below the prices offered at the more convenient retail outlets like the internet preferred by the nonelderly population. Senior citizen discounts pose an additional difficulty in measuring the inflation experience of the elderly. Because inflation depends on the rate of change of the CPI , senior citizen discounts that represent a fixed-percentage reduction from the normal retail price are not a major concern since they will have, at most, a small effect on the growth rate.

Senior citizen discounts that are not a fixed-percentage markdown from the retail price, however, will introduce errors into the CPI-E measure of inflation for the elderly. Finally, it should be noted that the usefulness of CPI-E for indexing Social Security benefits is limited by the fact that many beneficiaries are not elderly. While all retirement beneficiaries must be at least age 62 by definition, spousal benefits, survivor benefits, and disability benefits can accrue to persons under age As of December , In , Starting the CPI-E indexation in May , two simulations were produced, one assuming that inflation for the elderly was 3.

Insolvency would occur in , assuming inflation as measured using the CPI-E of 3. The Hobijn and Lagakos results cited above are based on changes to the overall inflation rate and hence include effects on nominal wage growth for example that extend beyond the change in the COLA calculations. OCACT also reported that fixed reductions of 0. Once again, because the perceived upward and downward biases in the current COLA calculations seem to be roughly of the same magnitude and hence offsetting, it seems unlikely that any attempt to simultaneously correct both perceived biases would have a substantial impact on the overall solvency of the OASDI system.

The general consensus of the economic literature on the CPI and COLA s for the elderly is that while the elderly may experience a slightly higher rate of inflation than the nonelderly, largely due to greater consumption of medical services, the CPI-E as it currently stands is an imperfect guideline for the indexation of benefits.

For example, the National Research Council concluded that there is no rationale for switching to an index along the lines of the CPI-E until the index can capture the differences in the prices or qualities of goods purchased by the elderly. As with other sources, the uncounted quality change is blamed for the overstatement in healthcare inflation, but the sources also cite Newhouse , stating that the measurement of medical care prices in the CPI overstated their rise during the periods studied.

Other studies also examine implications of further use of the CPI to adjust benefits. The Boskin Commission made several recommendations regarding measurement of the total CPI including the addition of "quality of life" issues in the survey.

They suggested including data on crime and the environment that "value not only the market consumption basket, but also the resulting leisure and quality of life experienced by the average individual.

The inclusion of a measure of "quality of life" is controversial, however. Tobin and Solow argued that attempting to judge the value of quality of life or environmental amenities in a price index is inappropriate.

Regardless of the methodology employed, the ultimate goal of these and many other papers is to construct as accurate an index as possible to reflect the rate of inflation experienced by a population. An index represents an average level of inflation over an entire population, however, and some individuals in that population experience rises in the cost of living that are higher or lower than indicated by any one particular index.

Unfortunately, consumer price indexes are not true cost-of-living indexes. Failure to completely account for substitution or changes in quality has led many economists, including the Boskin Commission, to conclude that the CPI overstates inflation.

While many of the suggestions made by the Commission have been implemented, only some of the upward bias in the CPI have been eliminated. Medical care has been a particularly troublesome area for the CPI. Rapid advances in technology introduce new treatments and increases in quality of medical care that the CPI does not completely capture.

Other studies have found that the rise in medical prices indicated by the CPI is overstated. This is exacerbated in the CPI-E because the elderly spend relatively more on healthcare, placing greater weight on this expenditure category than the currently published indices. Likewise, over one-fifth of persons age 62 or older are not beneficiaries, but they are included in the CPI-E population. HR th Congress , however, would have required the formation of a separate Consumer Price Index Review Committee to create a more accurate price index for the elderly and repealed the increase in tax on Social Security benefits.

Price indexing of benefits refers to a change in the formula for calculating the initial benefit. COLAs are applied only after the initial benefit has been calculated.

However, such a price index does not currently exist and significant effort would be required to implement a chained price index for the elderly. There is a substantial lag in calculating final values for the chained C-CPI-U so we have used interim values for This lag is discussed in greater depth later in the paper.