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Why Social Security recipients may feel the pinch

Monday, 14 Oct 2013 | 3:38 PM ET
Christian Rummel | E+ | Getty Images

Social Security recipients aren't expected to get much of a benefits raise next year, and that's prompting the question of whether the government does a good job of estimating how much seniors pay to maintain their standard of living.

"The real problem here is that the cost-of-living adjustment that Social Security uses doesn't fully reflect the prices that older Americans face," said Richard W. Johnson, director of the program on retirement policy at the Urban Institute.

For years, the government calculation of Social Security cost-of-living adjustments (COLAs) has been based on the Consumer Price Index for Urban Wage Earners and Clerical Workers. As that measure has remained low in recent months for items such as food and energy, many economists expect a paltry increase in 2014.

Based on its analysis of the government data available, the Associated Press projects that next year's increase for Social Security recipients and others who receive government benefits will be roughly 1.5 percent. That follows a 1.7 percent increase for 2013.

It's not clear when the government will release the official COLA. The Labor Department was supposed to issue a report this week that would be used to calculate it, but the government shutdown has delayed that.

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Many economists disagree with COLA calculations in part because seniors' expenses are different than those of younger people. They tend to have higher health care expenses, for example, and to be clustered in certain geographic areas.

"I don't think we have a really good measure of what the inflation rate faced by the average senior is," said Alan Auerbach, director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley.

Still, he argued that retirees have fared generally better than younger Americans because they haven't been as affected by the difficult job market.

The Bureau of Labor Statistics has calculated an experimental consumer price index for people 62 and older that historically has had a slightly higher overall inflation rate than the index used to make Social Security adjustments. But because the sample size is relatively small, the BLS says the results should be considered cautiously.

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The method used to calculate Social Security increases has become a bigger issue because the weak economy and minimal inflation have led to several years of low or no COLA.

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Douglas Handler, chief U.S. economist with IHS Global Insight, said paltry increases leave retirees on a fixed income with little buffer if a necessity, such as home heating, has a sudden price spike.

The adjustment is also becoming a more urgent issue because the population is aging, leading to greater reliance on Social Security.

That's raising another worry: Whether there will be enough money in the coffers to fund benefits for the coming decades.

One proposal politicians have floated for getting a handle on expenses would be switching to a different consumer price index, called the chained CPI, for calculating benefits increases.

The chained CPI assumes that when prices go up for one commodity, such as beef, people react by buying a cheaper item, like chicken. Many economists say switching to the chained CPI would mean even lower benefit hikes in coming years.

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Joel Naroff, founder and president of Naroff Economic Advisors, said that though moving to the chained CPI would save money, it would also further remove benefit increases from older Americans' actual expenses.

"If you're going to say that you want to have a cost-of-living adjustment for Social Security, then find the measure that most closely matches their consumption bundle," Naroff said. "Otherwise, stop the game. Call it, 'I want to lower the rate of increase of Social Security payments, and that's all I'm trying to do.' "

—By CNBC's Allison Linn. Follow her on Twitter @allisondlinn and Google or send her an email.