Change will affect Social Security COLAs

May 25, 1998|By BRENDAN KIRBY

Congress has passed no law on the subject, but Hagerstown resident Virginia Miller will see a smaller cost-of-living increase on her Social Security checks in two years.

The Bureau of Labor Statistics announced last month that it is changing the way it calculates inflation in an attempt to better reflect how quickly prices rise.

The agency estimates the changes, which will take effect this January, will reduce the official inflation rate by about 0.2 percent.

That change will affect Social Security checks the following year, when a lower inflation rate will translate into smaller cost-of-living increases.


"The change is due to attempts to make the Consumer Price Index more like a cost-of-living index," said Patrick C. Jackmon, an economist for the Bureau of Labor Statistics.

For Miller, the change will mean her Social Security income will rise about 0.2 percent less than it would under the old calculations.

"The COLA is now practically nothing. If they keep adjusting it down, we're not going to get anything," said Miller, who lives on Mt. Aetna Road. "We have a large group of senior citizens in Washington County. They worked all their lives."

The effect would be relatively small. For example, the typical retiree earning $8,988 last year received a cost of living adjustment, or COLA, of about $170.76. But if the new calculation was in effect, the COLA would have been about $18 less.

"The lower your income, the more important that becomes," said Laurel Beedon, a researcher with the Public Policy Institute of the American Association of Retired Persons. "It's all relative."

Beedon said older people often feel like they are losing ground. In many cases they are, because Social Security is often just a part of retirement income, she said.

Income from other sources usually does not rise with inflation, she said.

While the impact on individuals may seem small, government officials say it could send a flood of cash into the federal treasury. The Congressional Budget Office estimates that reducing the consumer price index, or CPI, by 0.2 percent will save the government $1.2 billion.

That's because the government will pay out less in Social Security benefits and collect more in taxes. Some taxpayers will pay more because deductions and exemptions - which are linked to the CPI - would be adjusted down.

Brian Rippeon, tax manager of Keller, Bruner & Co. in Frederick, Md., said the changes will mean more cumulatively than individually.

"I don't think any one person's going to get it too much," he said.

How the change works

The government calculates the inflation rate through a complex system of surveys of households and stores around the country. The Bureau of Labor Statistics examines different categories of goods and services.

For years, many economists have agreed the system overstates the true inflation rate, but they have argued over how much.

Last month, the agency decided to implement a new system that reflects changes consumers make when the price of one item rises.

For example, if the price of a brand of ice cream increases, shoppers can switch to another brand, buy a smaller quantity or go to another store.

Beedon, of the AARP, said the adjustments were made after a comprehensive refining process.

"It is as much art as it is science," she said.

Beedon said it is vastly preferable to other proposals to reduce the CPI by as much as 1.5 percent. That would be devastating, she said.

Beedon also said efforts to improve the inflation calculations might not take into account unique circumstances that seniors face.

For instance, less-mobile seniors might not be able to drive to another store to buy a lower-priced substitute when the cost of a product rises.

Miller, who is president of the Hagerstown chapter of the AARP, said she and her friends don't need a study to tell them their money does not go as far.

"I think inflation's a lot more than what they think it is," she said. "Every time you go to the store, you get less than what you got a week before."

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