“Cost-of-Living Adjustments” 

and Federal Benefits

AARP Public Policy Institute Briefing

March 11, 2013

Stephen C. Goss, Chief Actuary

Social Security Administration
Purpose of Benefit Adjustments

• What “level” do we intend to maintain?

1) Standard-of-living increases? 

2) Pure price increases?

3) Modified price increases?

4) Price increases for the elderly?

• Adjustments across generations

 Social Security: Standard-of-living increases

 SSI: Modified price increases (lowered)

• Adjustments after an individual’s benefit starts

 Both: Modified price increases (lowered)

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What Level Do We Intend to Maintain?

1) Standard-of-living increases

– Change in average earnings level of workers

– Reflects “real” income growth (about 1.1 percent per 

year)

• Ability to increase consumption in line with workers

• Consistent with lifetime income hypothesis

• Maintain relative income position in the society

– Social Security maintains initial benefit replacement 

rate across generations

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What Level Do We Intend to Maintain?

2) Pure price increases

– Old-style CPI, without adjustments

– “Fixed market basket”

• Nothing added for new items we purchase, but prices drop a 

lot after introduction

• No effect for changing purchase weights

• No effect for increasing average real income

– What we had in the 1970’s when automatic COLAs 

started

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What Level Do We Intend to Maintain?

3a) Modified price increases (lowered)

– Current CPI-W, includes some adjustments

– Presumes substitution within strata (categories)

• Still nothing added for new items we consume, but dropping 

prices after introduction are reflected even more 

• Presumes shift to items inflating less; not necessarily from 

steak to hamburger, but to whatever has less price increase!

• No effect for increasing average real income

– What we have now with “geometric means” 

adjustment within each of the 211 strata of goods and 

services 

• This has slowed CPI increase by about 0.2 percent per year

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What Level Do We Intend to Maintain?

3b) Further modified price increases (lowered)

– Chained CPI-U, includes more adjustments

– Presumes substitution within and across strata

• Still nothing added for new items we consume, but dropping 

prices after introduction are reflected much more 

• Incorporates any shift across non-substitutable strata

– Reflects shifts by all urban consumers

– Not necessarily from luxuries to staples, but whatever happens

• No effect for increasing average real income

– What we can have assuming that overall changes in 

distribution of consumption across broad strata of goods 

and services apply equally to beneficiaries

• This would further slow CPI increase by about 0.3 percent per 

year 

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What Level Do We Intend to Maintain?

4) Price increases for those aged 62+

– CPI-E reflects “market basket” across 211 strata for 

those age 62+ (more medical and housing)

– Presumes substitution within strata

• Still nothing added for new items we consume, but dropping 

prices after introduction are reflected more 

• Same weights and presumed substitution within strata as for 

all urban consumers; might be different for those age 62+

• No effect for increasing average real income

– Experimental? Sample too small for CPI-E?

• 2006 (BLS) CPI-W 37% CPI-E 16% 

• 2009-10 (BLS) CPI-W 33% CPI-E 24%

• 2020 CPI-W 30%? CPI-E 30%?

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Benefit Adjustment Options: 

What do we intend and what is appropriate?

1) Standard-of-living increase? (average earnings increase)

• Increase benefits at same rate as for workers

• Annual increase 1.1-percent more than current CPI-W

2) Pure price increase? (old-style CPI)

• Would not presume behavioral shift to slower inflating items

• Annual increase 0.2-percent more than current CPI-W

3a) Modified price increase? (current CPI-W)

3b) Further modified price increase? (chained CPI-U)

• Reflects overall shifts across non-substitutable categories 

• Annual increase 0.3-percent less than current CPI-W 

4) Price increase for elderly? (CPI-E)

• Would reflect the actual market basket consumed by those age 

62 and over; possibly more appropriate for disabled as well?

• Annual increase 0.2-percent more than the current CPI-W 

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Increase in Benefit Levels Depends on 

Intended Adjustment Goal

Comparison of Social Security Retirement Benefit 

Levels with Different Annual Benefit Adjustments 

$1,200

$1,600

$2,000

$2,400

$2,800

$3,200

$3,600

62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92

Age (with eligibility at age 62)

Monthly Benefit

1) Standard-of-Living Increase

(average earnings)

2) Pure Price Increase 

(old CPI)

3a) Modified Price Increase

(current CPI-W)

3b) Further Modified Price

Increase (Chained CPI-U)

4) Elderly CPI (CPI-E)

24% higher than 

Current Law

4% 

higher

6% lower

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Effects on Benefit Levels Accumulate with Age 

(with time since eligibility)

Comparison of Social Security Retirement Benefit 

Levels with Different Annual Benefit Adjustments 

80%

90%

100%

110%

120%

130%

140%

62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92

Age (with eligibility at age 62)

Percent of Present Law Benefit

1) Standard-of-Living Increase

(average earnings)

2) Pure Price Increase 

(old CPI)

3a) Modified Price Increase

(current CPI-W)

3b) Further Modified Price

Increase (Chained CPI-U)

4) Elderly CPI (CPI-E)

24% higher than 

Current Law

4% higher

6% lower

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