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September inflation and Social Security's Cost Of Living Adjustment

AILSA CHANG, HOST:

Tens of millions of people who rely on Social Security got some news that they've been waiting for today. Their benefits are going up next year. That's right. Starting in January, the average retiree will get an extra $55 in their monthly payment. That's an increase of 3.2% over this year's benefits. It's designed to offset inflation, but it may not keep pace with the actual cost of living. NPR's Scott Horsley is here to explain. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ailsa.

CHANG: OK, so I understand you've been talking with some seniors about this increase. What are you hearing from them?

HORSLEY: Yeah, a lot of people who depend on Social Security have been eager to hear how much of a jump they can look forward to next year. For those like Carol Egner, any boost in their monthly benefit is good news.

CAROL EGNER: Every little bit helps, I mean, if everything keeps going up.

HORSLEY: Egner lives in Ketchikan, Alaska, and says her Social Security check barely covers necessities like insurance and heat.

EGNER: There's nothing left over for anything else - birthdays, Christmas. I mean, you know, when you talk about real life, it makes it pretty tough.

HORSLEY: Next year's increase will be a lot smaller than the one Social Security recipients got this year. That 8.7% jump was the largest in decades. Of course, inflation has also eased up a lot in the last year.

CHANG: Yeah, but prices for things like heat and insurance are still climbing, right?

HORSLEY: That's right. We got new inflation numbers today, and they show that consumer prices in September were up 3.7% from a year ago. That's similar to what we saw in August, although it is way down from the nine-plus-percent inflation rate we saw last summer. Prices rose four-tenths of a percent just between August and September, and a lot of that was rising rents and gasoline prices. We did see falling prices last month, though, for back-to-school clothes and used cars.

CHANG: So how does the cost of living increase that social security is planning compare to the actual increase in the cost of living?

HORSLEY: It certainly helps. You know, so-called fixed incomes are not really fixed. They adjust every January in line with the inflation rate for the previous July, August and September. You don't have to negotiate this increase with the boss or even get Congress to approve. It's just baked in. And Max Richtman, who heads the National Committee to Preserve Social Security and Medicare, says that is a good thing.

MAX RICHTMAN: That's one of the real beauties of Social Security - is it has this built-in adjustment for inflation. You know, I do a lot of town hall meetings, and people are always happy when there's an announcement of a COLA.

HORSLEY: But that said, a lot of retirees do have complaints about the yardstick that's used to calculate this cost-of-living increase. You know, benefits will be going up 3.2% next year, but the average inflation rate these last three months has been higher than that - more like 3.5%.

CHANG: Wait. Why is that?

HORSLEY: Well, because the cost of living increase is tied to a different price index. It's an older index designed for urban wage earners and clerical workers, in the government's terms. And Richtman says it's just not really suited for the task at hand. For example, that older index overweights transportation cost, even though most retirees don't drive as much as people who are commuting to work or taking kids to school. And at the same time, it underweights medical cost, even though that's a major out-of-pocket expense for a lot of seniors.

RICHTMAN: If the purpose of the COLA is that you don't lose ground in your benefit, then the formula has to be accurate, and you have to measure inflation as it's impacting a senior.

HORSLEY: The government actually does have a separate index that's specifically designed to measure costs that older people face, but that's not the index Social Security uses to calculate the COLA. If it were, seniors would be getting a bigger bump next year - something like 4% instead of 3.2.

CHANG: That is NPR's Scott Horsley. Thank you Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

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Scott Horsley
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
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