Should the CPI-E Be Used for Social Security?

Using the consumer price index for the elderly for cost-of-living adjustments would likely result in higher Social Security benefits.

The Congressional Research Service issued a report on the hypothetical use of the CPI-E, or the consumer price index for the elderly, to calculate annual inflation adjustments for Social Security benefits. In summary, the researchers found that using the measure for cost-of-living decisions would create more generous Social Security benefits, but also risk being less accurate.

The Bureau of Labor Statistics tracks several measures of inflation. The price index used to calculate the cost-of-living adjustment for Social Security currently is the CPI-W, or the consumer price index for urban wage earners and clerical workers.

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The CPI-E is another measure of inflation that focuses on the spending habits of the elderly and uses a different weighting system based on how those aged 62 or older tend to spend their money, since they have different spending habits. The CPI-E is higher most years than the CPI-W because it is weighted more heavily toward health expenses, and inflation in health care has outpaced most other industries.

According to the CRS report, the CPI-W adjustment from 1985 to 2024 was 188%, but it would have been 211% had the CPI-E been used instead. The report also notes that the COLA for 2024 was 3.2%, but would have been 4% under the CPI-E. This would have increased the average monthly benefit from $1,907 to $1,922, though researchers note that, depending on other factors, the CPI-E would not always outperform its CPI-W counterpart.

Some advocate that this measure should be used to calculate the COLA for Social Security, and there is pending legislation to do just that. The Social Security Expansion Act, introduced in February 2023 by Senators Bernie Sanders, I-Vermont, and Elizabeth Warren, D-Massachusetts, would require the use of CPI-E for Social Security COLA.

Joel Eskovitz, the senior director of Social Security and savings at AARP, says that “AARP supports using a CPI-E as a more accurate measure to calculate the Social Security COLA.”

However, there are some methodological issues with its use and the CPI-E currently has no official usage, despite being tracked by BLS since 1982, according to researchers. Those include:

  • The CPI-E is a measure of weighted inflation for those aged 62 and older and not those collecting Social Security per se;
  • the weighting system for the CPI-E is also based on the Consumer Expenditure Survey, which does not specifically sample those 62 and older, resulting in a small sample size and higher sampling error; and
  • the CPI-E also does not account for the geographic distribution of those 62 and older, which is non-random, and it does not account for senior discounts.

Eskovitz explains that “the CPI-E is only experimental, and is subject to a higher sampling error because the BLS uses a much smaller subset of data to create this index than it does for CPI-W.”

He adds: “We support a COLA that more accurately reflects the spending patterns of older Americans, and for the BLS to better develop a measurement that meets that standard.”

Eskovitz cautions that “the CPI-E is not always a more generous measurement than the existing CPI-W. In some years, it underperforms the CPI-W.” However, “the true impact of the COLA is not felt on a year-to-year basis, but instead is felt over time by the compounding effect, and there it is clear that older Americans would certainly benefit in the long run from a switch to a CPI-E because of its increased accuracy.”

Funded Status of U.S. Corporate Pension Plans Continues to Improve in May

Funded status improvement continues for fifth consecutive month, though in contrast to April, strong equity markets bolstered a decline in fixed income, firms report.

 

In May, the financial health of U.S. corporate pension plans experienced a marked improvement, continuing a positive trend seen over the past five months, according to a round-up of the country’s pension watchers. 

The main reasons for the positive funding trends in May across various corporate defined benefit plans included positive economic indicators, strategic investment approaches such as cash-flow-driven strategies and resilience in market performance despite lower interest rates.

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“May’s improvement is the fifth month in a row of funded ratio improvement,” says Zorast Wadia, principal and consulting actuary at Milliman.

This month’s strength of funding ratios, Wadia noted, was driven by equity markets that were strong enough to counter a decline in discount rates, which dropped about 13 basis points to 5.53% from 5.68% on average. That was a turn from April, when discount rates increased by 44 basis points, helping to create that month’s funded status boost.

“May’s improvement was very different as April was a very poor return month,” Wadia says. “That was the worst return month of the year. January, February and March were generally stable or positive return months.”

Similar to those earlier months, Wadia says May’s assets increased more than liabilities. As a result, there was a $4 billion pickup in the funded status, he says, representing a percentage change from 103.1% to 103.4%.

“So again, we’re still in surplus territory and there continues to be an improvement,” he says.

Positive Funded Status

October Three reported similar positive trends, with higher stock markets counterbalancing the impact of lower interest rates.

The actuarial service provider’s analysis of two model plans revealed that Plan A, a traditional plan with a 60/40 asset allocation, saw a significant improvement of over 1% in May, culminating in an 8% increase for the year.

The Plan B portfolio, which is more focused on retirees and emphasizes corporate and long-duration bonds, recorded a modest gain, bringing its year-to-date improvement to nearly 2%.

LGIM America’s Pension Solutions Monitor also documented an increase in pension funding ratios, rising to 108.8% from 107.6% over the month. The firm attributed the increase to strong performances in equity markets, with global equities rising by 4.1% and the S&P 500 by 4.8%.

The average discount rate decreased by 20 basis points, largely due to a reduction in the Treasury rates. These factors contributed to a 3.5% increase in plan assets, surpassing the 2.3% rise in liabilities and leading to an overall improvement in funding ratios, according to LGIM.

Wilshire’s analysis indicated just a slight increase in the aggregate funded ratio for U.S. corporate pension plans, rising by 40 basis points to 100.6% by the end of May. This increase was driven by a 2.6% rise in asset values, which more than offset a 2.2% increase in liabilities. Despite the drop in corporate bond yields increasing the liability value, the positive returns from most asset classes contributed to the improved funded ratio.

Strong Economics

Michael Clark, chief commercial officer at Agilis, agreed that May was a positive month for pension plans, buoyed by positive economic indicators and strong market performance.

“Even though discount rates were down on the month, the corresponding increase in liabilities was generally not enough to bring funded status down,” says Clark. “We keep beating the drum that plan sponsors need to take a serious look at how well they are hedged against interest rates, and we haven’t changed our tune.”

WTW reported that its Pension Index reached its highest level since late 2000, reflecting a 0.5% increase in May. This improvement was driven by strong investment returns, particularly in the equity portion of the benchmark portfolio, which saw a 4.6% return. For WTW, fixed-income investments also performed well, with long Treasury bonds and long corporate bonds leading the gains.

Adding to the optimistic outlook, Adam Turnquist, chief technical strategist for LPL Financial, provided a broader market perspective. He noted that the S&P 500’s 4.8% rise in May contradicted the traditional “Sell in May and Go Away” strategy, suggesting that the adage might be less relevant in today’s markets.

Turnquist highlighted that April’s losses were more than offset by May’s gains, underscoring a robust market rebound that bodes well for the future performance of pension plan assets.

Finally, Insight Investment highlighted a 1.1% increase in funded status, moving to 114.6% in May from 113.5% in April. This gain was, again, primarily driven by equity outperformance despite a modest decline in Treasury rates.

“At prevailing funded status levels, more certain approaches to meeting benefit obligations can be implemented,” said Ciaran Carr, head of client solutions group in North America at Insight Investment. “Cash-flow-driven investment strategies seek to incrementally improve the surplus position with a lower likelihood of incurring future funded status deficits.”

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