CPI-W vs CPI-E: Why the difference is so important to seniors

An interesting follow-up to last Thursday’s post regarding the fact that there would be no Cost of Living Adjustment for Social Security in 2016. In talking to many seniors, they've often lamented that whatever the government uses to calculate inflation for COLAs is a far cry from what they actually experience in real life. Perhaps even the government concedes they have a point, though the research is still in it's early stages. From MarketWatch:

Social Security recipients are going to get no cost-of-living adjustment next year. But if the determination was based on the government’s own estimate of what inflation is like for those 62 years and over, there would be a rise in benefits.

Social Security is calculated based on the change in prices for an inflation measure called CPI-W during the third quarter. That dropped 0.4% from the third quarter of 2014 to the third quarter of 2015.

But the Labor Department also calculates an inflation measure called the CPI-E, which is the consumer-price index for Americans 62 years of age and older. That grew 0.6% during the same period.

Put another way, Social Security recipients are missing out on an as much as $44 a month due to the way inflation is measured.

In fact, the elderly inflation measure has outgained the CPI-W for the last four years, using the same third quarter-to-third quarter time period.

The main difference between CPI-W and CPI-E is the proportion allocated to medical-care spending, which for the elderly is roughly double that of the general population. The elderly also spend more on shelter.

The Labor Department admits it has done about 20% of the research in constructing the CPI-E to create a “basket” of goods and services that it has done for the other measures of inflation. It is so experimental that the agency doesn’t even regularly publish the data, though, as shown here, it is available upon request.

Moreover, even if the agency had more faith in its elderly inflation measure, it would be up to Congress to change the COLA formula.