Wednesday, January 27, 2010

Why Has My Social Security Check Not Increased Along With Everything Else?

      In spite of the fact that we have been in a recession since early in 2008, it is apparent that the cost-of-living for post-youths has been increasing over this period. So why is my Social Security check less this year than it was last year?
      Actually, the amount received for Social Security has not changed because of the way the Social Security Administration computes it, but the deduction for Medicare has increased.
      In order to measure general price increases, the Bureau of Labor Statistics constructs an imaginary "market basket" of goods that an average family needs to lead an average life. The market basket includes specific items relating to housing, food, transportation, medical care (not including health care premiums paid by the employer), clothing, entertainment, education and communication. Currently, there are approximately 80,000 items in the "basket."
      The final price is actually a weighted sum, the weights reflecting the proportion that the average family spends on various categories and population of the geographic area.
      The CPI is the index number created from the "price" of the entire market basket. Currently, the base "year" for the CPI is 1982-84. This means that the average of the CPI over the three years 1982, 1983, and 1984 is set equal to 100.
      The Bureau of Labor Statistics actually publishes two CPI's, the CPI-U (All Urban Consumers) and the CPI-W (Urban Wage Earners and Clerical Workers). For calculating Social Security benefit payments, the Social Security Administration uses the CPI-W, which is based on the expenditures of urban households more than half of whose income comes from clerical or wage occupations. The Bureau of Labor Statistics estimates that it represents about 32% of the US population.
      The CPI completely ignores important changes in taxes, health care other than out-of-pocket costs, water and air quality, crime levels, consumer safety, and educational quality.
      It is important to note that the CPI-W is based on costs of working households. Costs of retired persons normally differ substantially from those of working people. Studies indicate that seniors spend more on health care (no surprise there), and housing (primarily due to the cost of retirement facilities). Both of these categories have experienced higher than average inflation rates.
      Some years ago the Federal Reserve Bank conducted a study (CPI-E) of the relative weighting of the various categories. The following table lists their findings:

Category                                    CPI-W                CPI-E
Food                                          16.30                  14.32
Housing                                     39.60                   45.94
Apparel                                      4.90                      2.77
Transportation                        17.60                  13.81
Medical care                              5.60                   10.24
Recreation                                  6.10                     4.36
Education                                   5.50                     2.98
Other                                         4.30                     5.59

      The study indicated that the CPI-E averaged 3.8% higher than the CPI-W. For the years 1984 – 2001, if the CPI-E had been used to calculate benefits, seniors would have received an average of $408 more per year.
      Because medical expenses and housing (for seniors) have not seen the mitigating effects of the 2008 recession, actual cost-of-living has gone up for seniors. But because they are substantially underweighted in the formula, Social Security benefits have not kept pace.
      Contact your representative about using the CPI-E for calculating benefits.

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