Expert: How to fix COLAs and survive inflation

The COVID pandemic hit the U.S. economy hard. In recent months, however, indicators show recovery, but with one new problem: Inflation. This week, Nathan Abse talks to retirement expert Mary Johnson of The Senior Citizens League on how bills in Congress could increase COLAs to better protect retiring feds, and seniors generally, from rising prices.


The COVID pandemic hit the U.S. economy hard, especially last year. But in recent months—as large numbers of adults got vaccinated, and restrictions on movement and commerce were lifted—the economy has recovered significantly. Unemployment has eased, from an official high of 14.7% in April 2020 to June 2021’s 5.9%. Economic growth, too, has snapped back from pandemic lows to 6.5%. Financial markets have rebounded. But along with the strong recovery have come the sharpest price jumps in over a decade—for an inflation rate of 5.4%, according to the Bureau of Labor Statistics. Inflation—not a hot topic in recent decades—suddenly is a top concern for retirees on fixed incomes, with no easy remedy for rising prices. This week, Nathan Abse interviews Mary Johnson, a Social Security and Medicare policy analyst with the nonprofit, 1.2 million-member strong The Senior Citizens League (TSCL). Johnson is expert in economic calculations affecting seniors—led by BLS’s Consumer Price Index (CPI) and SSA’s cost-of-living increases (COLAs) that determine adjustments to key sources of seniors’ income, such as Social Security, federal retirement and other pensions. Readers should note that federal retirement, most prominently the Federal Employees Retirement System, have COLAs tied to the problematic CPI-W.

Q&A with Mary Johnson

Let’s start with the most troubling number that your group TSCL highlights: How much Social Security buying power is lost due to Social Security payments not keeping pace with inflation?

Johnson: From 2000 to 2020, 30% of buying power eroded from Social Security payments. 

That’s huge! You’re expert on COLAs, and Social Security COLAs. Though clearly not adequate, seniors need COLAs. So: What are COLAs, when did they begin, and why are they important?

Johnson: “Automatic” annual COLAs for Social Security have been around since 1975. They are important because Social Security is among the few sources of retirement income that are adjusted for inflation. That’s very important, because with COLAs [even if they have been inadequate] there is an intention to protect the buying power of these benefits as people age. We have to better ensure that this happens, because otherwise over time the same amount or inadequately increasing amount of money, of course, tends to buy less and less. So, Congress’s idea in the 1970s was to go ahead and just such adjustments automatic, to protect people who are living on fixed income from having to see their standard of living decline over time because of inflation.

Why did Congress enable yearly “automatic” Social Security COLAs, beginning in the 1970s? 

Johnson: Congress moved to make COLAs automatic in the mid-1970s pushed by oil price spikes and other causes of rapid inflation. By the way, prior to 1975 there were already Social Security COLAs, but those had been legislated as needed—on an ad hoc basis. 

Coming back to the present, why is inflation in the news now? 

Johnson: Good question. Since 2010, inflation has been abnormally low, from an historic perspective. With such low inflation, COLAs have averaged 1.4%. During the entire past dozen years, since the financial crisis in 2008, there have been only 3 years—2011, 2017 and 2018—in which the COLAs applied to Social Security have exceeded 2%. In only one of those years—2011—was it fairly significant, at 3.6%. That was the highest. These past dozen years add up to a long stretch of abnormally low inflation, historically speaking. 

So, in recent times, the price jump this year is a major anomaly? 

Johnson: Yes. And it’s a pretty big move. This year, with this inflation, we at the Senior Citizens League are forecasting a 6.1% Social Security COLA. Inflation has just been so volatile. People are watching inflation just blow up at the moment. 

Should seniors be worried, then? Since for so many, income is fixed or augmented only by often-inadequate COLAs? What are your thoughts on where inflation is going? 

Johnson: There is going to be some worry. But I have a really strong sense that some of this inflation is going to be temporary. Inflation is there, but it may not be as bad as it looks. At the moment, we are comparing price growth now to 12 months ago, when prices were in a very deflationary cycle. So, of course, prices look like they made a big jump. You have to consider that, going from that unusually low situation to a fast recovery. Yes, there is now more inflation than in recent years. But the steep recovery from the COVID dive accounts for some of it. 

You said “some”—so, what are other significant sources of recent higher inflation?

Johnson: Well, there are other pieces of the downturn—many related also to COVID—that ultimately led us here, to this inflation. We started out in COVID with an oversupply of gasoline. That’s not the case now. The price has shot up by close to 50% year-over-year! This is important, and it’s been very inflationary. All the more so for COLA calculations, since gasoline is weighted under the CPI used by Social Security in calculating its COLAs—it’s a big driver of the increase. 

Of several Bureau of Labor Statistics CPIs, which one does Social Security use in its COLAs? 

Johnson: For its COLA calculation, Social Security uses what’s called the “Consumer Price Index—W,” or “CPI-W”—meaning, “for urban wage earners and clerical workers.” 

Your nonprofit, TSCL, thinks that for seniors Social Security—and for that matter, other pensions, like federal retirement—should use a different CPI calculation. Why?

Johnson: When calculating COLAs for seniors you should use a different CPI, yes. Because the currently used CPI better reflects an “average” person, a younger person’s, use of money. We seniors actually spend our money differently. We spend proportionally more on housing and, more still, on health care. Both of these sectors’ prices have been rising at a dramatic rate—even accelerating—in recent times. We need a different CPI for our COLAs. Using a more accurate CPI in calculating our COLAs is a necessity to prevent erosion of our spending power. 

What other CPIs are there, and—again—why doesn’t Social Security just use a better CPI? 

Johnson: There are a handful of CPIs. There is the “research CPI” more commonly called the “CPI-E”. There is also the “chained CPI,” which you may have heard of in the news. It has some real drawbacks as a measure of inflation for seniors, but nonetheless was discussed for Social Security use. But the fact is, since 1975 Social Security has used the “CPI-W.” Without going into too much detail, I have to say, none of the CPIs are perfect—but, bottom line, we find CPI-E would be best for retirees.

Why are COLAs—drawing on only slightly different CPI equations—so important for retirees?

Johnson: There are two main things to understand about the importance of COLAs and calculating them with a good, reflective CPI. First, for most seniors, retirement doesn’t last just a year or a few years, but 20 or 30 years or more. If you get that, you soon understand that adjusting retirement income for inflation accurately is important. Otherwise, over a long haul there will be a lot of lost buying power. Second, CPIs used to calculate COLAs are very important, even if the differences among each CPI might be very small. Sure, from one year to the next, the difference between two ways of calculating CPI might be a mere tenth of a percentage point. But those numbers—and the tiny differences in them in this or that year—are like the interest rates on a long-term bond or a CD: over time, they add up! The interest compounds. So, similarly, if calculated correctly, COLAs will maintain a senior’s buying power. 

You and TSCL want Social Security to go from CPI-W to CPI-E, in calculating COLAs for seniors, right?

Johnson: That’s correct, we want CPI-E. Because over the long haul we can see using CPI-E would be better than the current CPI-W for helping seniors maintain buying power. Now, I have to say if you research this it’s not true for each and every year. Some years will be exceptions. There are years when seniors would benefit more from one or the other of the CPIs that we don’t endorse—for instance, this year, the CPI-W that Social Security has long used will result in a higher COLA. CPI-W results in a higher COLA calculation this year largely because of the dramatic rise in fuel prices. So, CPI-E is not always best. But over time, we find it to be. (If your readers want specifics, CPI-W at the moment, I believe, stands at 6.1% and CPI-E is at 4.7%. These are estimates and will change with new data over the next couple months). 

Does TSCL have its own stats on how tough pandemic economic issues have been on seniors? 

Johnson: Yes. We have done our own online poll on this, with 506 people responding. People were asked, “Which of the following financial actions have you taken during the pandemic?”—and to pick all answers that apply from our list. So, 33% say they spent all emergency savings, 19% said they drew down retirement savings, 11% reported they had to go back to work or take a new job—and that number jumped up just over a couple months, 8% said they applied for pharmacy assistance in getting at least one of their prescription drugs, 9% say they had to apply for help from Medicare. And here’s a powerful number: 19% report they either visited a food pantry or applied for federal SNAP assistance for getting food. This is way, way too high. And 12% said they had taken in family providing room and board or other assistance for adult children or grandchildren. Fully 40% said they did not have any of their own retirement savings! 

What do you and the TSCL think would help seniors, at least with inflation?

Johnson: We have a three-pronged solution that we advocate. First, we think there should be a “boost,” a benefit boost for all retirees. We think that this boost is needed to make up for a lot of income unfairly lost by retirees over the years, as I’ve discussed. The CPI-W index used to calculate COLAs—for Social Security [Editor’s note: and federal retirement plans] is just not representative of the spending patterns of retirees. In essence, retirees on Social Security have lost a lot of income, which has compounded over time, because of the use of this unrepresentative CPI and COLA. 

What are the other two prongs? 

Johnson: The second prong is for Social Security COLAs, going forward, to be tied to a more representative consumer price index. As I said, for seniors that means we should move from using CPI-W to CPI-E. The third part is we need to pass legislation that puts in place greater protection for seniors against deflationary losses, deflationary reductions in Social Security. Three years the COLA was calculated at zero, and three other years it was at like 0.3%, or almost zero. We think, particularly given how much buying power has already been lost, that we’d like to see a guaranteed minimum 3.0% annual COLA. And bills that would accomplish much of this have been introduced like the Social Security 2100 Act bill, introduced by Rep. John Larson (D-Conn.) last year. More recently there’s been the Fair COLAs for Seniors Act 2021, pushed by Rep. John Garamendi (D-Calif.). 

How much money are you asking for in your “boost” proposal? 

Johnson: We are asking for a very modest boost. It’s in the Larson bill, based in part on surveys of what people need. It comes to a 2 percent increase in benefits. Right now, the average Social Security benefit is around $1550 per month. So, we’re talking a boost of $20 to $30 per month, on average—very modest. As I said, there’s been a clear 30% loss of Social Security payment buying power. By the way we need to recalculate this figure, on our website, revising upward, because of the pandemic and inflation. Even when it’s revised, though, the requested boost will be modest—in part because the same legislation also mandates use of the more reflective CPI-E for calculating annual COLAs, for seniors—so payments would improve over time. 

How attainable are your goals: SSA COLAs tied to CPI-E, the “boost” and deflation protection? 

Johnson: The reality is Congress needs to do these things. And Congress needs to ensure adequate funds to cover the increases. Changes in the law would do so by raising the ceiling on income that comes under Social Security taxes. They also would slowly and modestly increase Social Security tax rates. To pass these will take finesse. There are many who—despite the need for a functional Social Security system—don’t want to raise payroll taxes, even modestly, to cover it. But this is something we can and must do, and can manage with incremental change. Readers should read the petition on TSCL website, and sign up!

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