"The consumer price index looks at how much costs have risen on a basket of goods and services, but that basket is based on the spending habits of urban wage earners and clerical workers. Seniors don't spend like this group does. Retirees tend to spend a lot larger share of their income on healthcare, which sees price surges in most years that far outpace inflation in other categories."
"COLAs are supposed to help retirees maintain buying power as inflation causes prices to rise. However, the way COLAs are calculated involves comparing the year-over-year changes to a pricing index called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Thanks to this flawed formula, cost-of-living adjustments are usually too small. The result is that benefits have lost 20% of their buying power since 2010, according to the Senior Citizens League."
Two common myths about Cost of Living Adjustments can harm seniors' finances. COLAs are intended to preserve retirees' buying power as inflation rises, but the COLA formula uses the CPI-W, which reflects urban wage earners' spending patterns rather than retirees'. The COLA calculation compares year-over-year changes in third-quarter CPI-W data to set future adjustments. Retirees allocate larger shares of income to healthcare and housing, where prices often rise faster than overall inflation. As a result, COLAs are usually too small and benefits have lost about 20% of buying power since 2010, per the Senior Citizens League.
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