The cost of consumer electronic is dropping, but what affect does that have on seniors?

The big news of last week for those receiving Social Security benefits was the announcement of a 1.7% benefit increase for 2013, thanks to a cost-of-living adjustment (COLA) linked to inflation.

These COLAs began in 1975, when Congress tied annual benefit adjustments to inflation. Each year when there’s inflation, benefits are increased to keep up with the rising cost of food, gas, health care, and other expenses. But some are calling the meager 1.7% increase “an insult,” and it has (again) raised questions about how the increases are calculated.

Currently, the Social Security COLA formula is based on an inflation measure specifically designed to reflect costs for “Urban Wage Earners and Clerical Workers.” This measure, called the CPI-W, assumes a “basket of goods” that includes some things seniors buy – including food, energy, apparel, transportation, and some things they typically don’t, such as cars and new electronics. This means the CPI-W often does not accurately reflect the costs seniors face.

As MarketWatch chief economist Irwin Kellner points out:

The price indexes that the government uses also include such items as cars, computers and cell phones, the prices for which are steady or even falling. Thus these indexes do not give enough weight to items seniors actually buy

For example, last year food rose 4.7%, apparel 4.6%, gasoline 10.3% and health care 3.5%. As you can see, these increases are well above the 1.7% COLA seniors and disabled vets will receive for 2013.

Fortunately, there’s an easy solution. Congress could change the COLA formula from the CPI-W to a new consumer price index developed specifically to reflect costs faced by elderly Americans – the CPI-E. The CPI-E (“Elderly”) would more accurately reflect costs for health insurance, hospitals, prescription drugs, nursing care and other expenses primarily incurred by seniors. In 2005, Washington Senator Maria Cantwell introduced a bill to establish a consumer price index for the elderly that would be used to calculate Social Security benefits, but it did not pass.

Instead of using a CPI based on a “basket of goods” that does not represent the purchasing habits of seniors, Congress should require the Social Security Administration to calculate benefit increases based on a CPI-E, which would better help seniors keep up with rising costs.