Consumer Price Index and Colas

In 1988 the BLS first produced monthly and annual experimental CPIs for Americans age sixty-two and over, with the series going back to December 1982. The index is referred to as the CPI-E. The creation of the index evolved from the 1987 amendments to the Older Americans Act of 1965, in which the BLS was directed to develop an index for older Americans.

The older population, upon which the experimental index is based, is identified as being age sixty-two or older and living in urban areas. Specifically this population includes the following:

1. Unattached individuals who are at least sixty-two years of age
2. Members of families whose reference person (as defined in the consumer expenditure surveys) or spouse is at least sixty-two years of age
3. Members of groups of unrelated individuals living together who share living expenditures, and whose reference person is at least sixty-two years of age.

About 22 percent of urban consumer units (upon which the CPI-U is based) meet the above definition, using data from the consumer expenditure survey data collected in 1993–1995.

Expenditures of some older people are excluded, while those of people younger than age sixty-two are included. For example, older people who are living in institutionalized housing are not included in the sample, nor are older people who are living with adult children. However, expenditures of children or other related individuals living in an older person's household are included.

Over the period 1983–2000, the CPI-E rose by an annual average of 3.5 percent, while the CPI-U averaged 3.3 percent. The CPI-W, the index to which Social Security is tied, increased an average of 3.2 percent.

As noted above, the CPI-W is used to adjust Social Security payments and many retirement payments. However, there are problems with both the experimental index and the CPI-W in terms of applicability to Social Security beneficiaries and to the older population specifically. With regard to the CPI-W, the population upon which this index is based does not include most Social Security beneficiaries, since by definition the population is composed of wage earners and clerical workers. The CPI-E also has several limitations as a potential index for escalating Social Security benefits. First, the group of persons age sixty-two and older is not likely the most appropriate population. Many people younger than sixty-two receive Social Security benefits. About 25 percent of all Social Security beneficiaries are younger people who receive benefits because they are surviving spouses and/or minor children of covered workers, or because of disability. The expenditure experience of this group is not included in the weights for the CPI-E. In addition, a sizable number of people age sixty-two and over do not receive Social Security benefits. In 1988, over 40 percent of the population age sixty-two to sixty-four did not collect Social Security retirement benefits. One might question whether such people's expenditures ought to be included in the calculation of an index for older persons if the goal is to adjust the Social Security benefits.

In addition, the outlets, items, and prices used for calculating the CPI-E are the same as those used for the CPI-U. This means that the way the CPI-E population shops and the prices they pay are not being accounted for separately in the experimental CPI-E. Older people not only may shop at different outlets than people in the CPI-U population, but also may use discounts that are not available to other consumers. Without the development of a series of household surveys for the older population, for example, that obtains detailed descriptions of items purchased by this group and the identification of the outlets where the items were purchased, a full-scale CPI for older persons is not possible within the BLS. To provide such an index would be costly and likely would take years to implement. Much research and development must be done.