MEDIA MISINFORMATION: Yahoo News' announcement of the Social Security cost of living adjustment

A study of macroeconomics usually reveals that the best time to buy anything is last year. ~ Marty Allen

On Oct 13^th my home webpage displayed a headline, "Bad News for Social Security Recipients." Intrigued, I clicked on it to learn what terrible circumstances we Social Security recipients might be facing.

The story covered the impending announcement from the Dept of Labor – delayed by the Republican-inspired shutdown – of what the 2014 cost-of-living adjustment (COLA) will be for people receiving Social Security and disability benefits. A whole lot of people receive either Social Security benefits or disability benefits that use this COLA – 71 million citizens (a bit less than 1 person in 4 in the US), ranging from retirees, survivors and disabled veterans to poor people who get Supplemental Security Income.

The expected 2014 COLA will be around 1.5%, which for the average Social Security beneficiary amounts to $17 per month. This COLA will be the lowest in years; only 6 times since the COLA was implemented 38 years ago has it been below 2%.

Way long ago, I used to write story headlines at my college newspaper. To label this below-normal level of COLA as "bad news" deserves an "F."[1] Calling a low COLA "bad news" implies that a higher COLA would be good news for affected citizens. This is untrue. Higher COLAs come from higher inflation, which reduces people's real income. Perhaps the headline-writer would rather have an uncola, or be living in Argentina, where consumer prices have risen a whopping 7 times as much as the US this year – 10.55%. This imprudent headline adds a mistaken sense that not only is Social Security an entitlement, but somehow a high-COLA is as well. This is economic nonsense.

The Social Security COLA represents changes in national prices, not prices in a specific location for a particular person or family. This COLA tracks the yearly change of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the months of July, August and September. If the COLA is low, it means consumer prices haven't increased much. This lack of inflation is good news for everyone who buys consumer goods and services.

Unfortunately, the headline-writer, like too many other people, does not understand what the COLA actually represents. This inability to distinguish between individual and national price changes is illustrated by the following comment to the Yahoo News article by someone called dvlsh11.

"I don't know how they can say 'prices haven't gone up,' gas is over 3 bucks per gallon, food prices seem to steadily rise, companies are saying things like laundry soap is 'concentrated so you use less' when you don't really use less they just give you less and charge the same amount as before. After rent/mortage most ppl's biggest bill are their utlity bills."  

Dear dvish11, get a grip: "they" haven't said prices haven't gone up. They have said prices have gone up a small amount – by about 1.5% – based on actual price changes. The COLA measures prices, not individual consumer behavior like over-using "concentrated" soap. National food prices have increased 1.6% in the past year; energy prices have declined 0.3% in the past year.

This low COLA means the Federal Reserve's monetary policy has successfully (and single-handedly) kept inflation in check (that's very good news) and offered a modicum of economic growth (OK news). Because of truculent Republicans, the US now conducts no appropriate fiscal policy whatsoever. So it is impossible to initiate a much-needed increase in government expenditures to remedy the lingering effects of the recession. Instead, government expenditures have decreased, further contributing to the economy's doldrums.

The Social Security COLA reasonably characterizes the average yearly change in national consumer prices. But there is a COLA war of sorts being waged among economists and affected parties. Some believe this COLA actually over-states the price changes that Social Security recipients face. In fact President Obama has mentioned he might be amenable to using a variation of the Social Security COLA based on "chained" prices, as a more accurate index [2], in return for more tax revenue. Unsurprisingly, groups like the AARP and labor unions are much opposed to chained price indices. I believe using a chained Social Security COLA could be one mechanism to accomplish a minor reduction in Social Security costs.

However, having a low Social Security COLA for 2014 – no matter what form – is good news for consumers of all ages.

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[1] The story itself doesn't make any misguided statements about the low COLA; it's quite factual. The headline-writer, however, should be sent to a remedial economics course.

[2] A chained price index more quickly adjusts prices to reflect consumer behavior when people substitute purchases of a cheaper good for another due to price increases of a substitute. A chained index thus could reduce the expenses connected with future Social Security COLAs.