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The Hidden Costs of Antiquated Calculations - A Closer look at COLA and CPI on Federal Programs

by: Bernard Pettingill, Ph.D., Nils Westerlund, DPT

Historically there have been years with no Cost of Living Adjustment (COLA) for Supplemental Security Income (SSI), examples seen in 2010 or 2011. However, there was a SSI COLA for 2012 of 3.6% affecting more than 60 million Americans. Note: The Social Security Act provides for automatic increases in Social Security and SSI benefits if the Consumer Price Index (CPI) as determined by the Bureau of Labor Statistics (BLS), increases.

Many other governmental programs also utilize COLA adjustments, such as Medicare and Medicaid. In addition, tax brackets are adjusted; if these brackets are revised incorrectly, it can result in reduced revenues. Higher expenditures vs. reduced revenues contribute to increased debt. Finally, inaccurate COLA calculations give recipients unrealistic views of local, state and national economic trends, which ultimately impacts personal consumption.

The CPI represents all goods and services purchased by the reference population and BLS has classified expenditures into more than 200 categories, arranged in eight major groups: (16.4%) FOOD AND BEVERAGES; (39.2%) HOUSING; (3.7%) APPAREL; (19.4%) TRANSPORTATION; (5.4%) MEDICAL CARE; (5.9%) RECREATION; (6.1%) EDUCATION / COMMUNICATION; and (4.0%) OTHER. For each of these categories, the BLS uses scientific statistical procedures to sample hundreds of items within selected business establishments to represent the thousands of varieties available. For example, in a given supermarket, the BLS may choose a bag of golden delicious apples, weighing 4.4 pounds to represent Apples. Other food items from the Food and Beverage group include: White Flour, White Rice, White Bread, White Sugar, Bacon, Grade-A Eggs, Milk and Peanut Butter.

The CPI has been analyzed by numerous professionals, who report that there are Sampling Errors, Non-Sampling Errors, Substitution Bias, Formula Bias, New Outlet Bias, Quality Change Bias, New Product Bias and Time of Month Bias with the BLS making statistical corrections. For example: Substitution bias can occur when breadbasket food items are substituted with less expensive items.

Changes have been initiated within the CPI due to the Boskin Commission (1995), set up by the president to examine bias. The Boskin Commission modified the CPI calculation, which professionals believe lowers the actual reported CPI. We agree that the CPI is understated and although this creates forecasting errors, we believe there are much bigger issues, namely, errors in the actual CPI variables vs. current governmental recommendations.

The United States Supplemental Nutrition Assistance Program (SNAP), historically known as the Food Stamp Program, recently initiated the Healthy Incentives Pilot (HIP), which offers select SNAP recipients a 30% subsidy on produce. Produce, under HIP, is defined as fresh, frozen, canned, or dried fruits and vegetables that do not have added sugar, salt, fat or oil. This initiative highlights one of our Nation's most pressing health challenges, i.e. poor diet.

The National Cancer Institute at the National Institute of Health reports that numerous diseases, such as heart disease, high blood pressure, stroke, various cancers and diabetes are directly linked to diet. In addition, the Center of Excellence for Research in Complementary and Alternative Medicine in Alzheimer's Disease (AD) at Mount Sinai School of Medicine reports since AD has no cure, an urgent need exists to find a means of preventing, delaying or reversing its course. Clinical and epidemiological evidence suggests that lifestyle factors, especially nutrition, may be crucial.

Medicare increasingly promotes “covered” preventive tests, such as: Yearly “Wellness” Visits, Bone Mass Measurements, Breast Cancer Screenings, Cardiovascular Screenings, Colorectal Cancer Screenings, Colonoscopy, Diabetic Screenings, Medical Nutrition Therapy Services, Pneumococcal Shots and Tobacco Cessation Counseling.

It is obvious that governmental agencies, insurers and researchers are promoting health and wellness; however, the CPI is not paralleling these trends and maintains its historical breadbasket focus. Based on evolving trends, below in Table 1 are listed current CPI breadbasket items vs. improved health and wellness trends with pricing; please note much higher food costs (141% higher).

In conclusion, the government should update the CPI breadbasket to reflect current health and wellness recommendations, which will unfortunately lead to increased COLA calculations. The authors also ask what other components of the CPI need to be updated and wonder who can afford an underfunded COLA?

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