Administration June 11, 2024

CPI-E More Generous, But Less Accurate, Congressional Research Service Says

A new report explains that the consumer price index for the elderly would need to be revamped before it could be used for any official purpose.

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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.”

Participants June 11, 2024

PSNC 2024: Enhanced Engagement Efforts

Encouraging participants to engage more with the retirement plan requires targeted communications, using incentives and leveraging technology, according to expert panelists.

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When looking to improve participant engagement in the retirement plan, it is important to consider that participants, depending on their age and life stage, have varying preferences of how involved they want to be with saving for retirement and selecting their investments. 

Landon Barnes, assistant vice president of customer experience retirement income solutions at Principal, said at last week’s PLANSPONSOR National Conference in Chicago that an effective strategy is to design retirement programs with three paths in mind. 

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The first path that some participants may desire is the do-it-yourself route, where they can select their own investment vehicles completely on their own. Others prefer a do-it-with-me approach, where they partner with the plan sponsor to receive some guidance about what the best options are for them. Lastly, the third path is for participants who want a completely hands-off approach and want their investments to be managed for them. 

“The challenge is really understanding what the life stage of the participant is [and] what is their mindset?” Barnes said. “You need to [design plans] with the understanding that [participants] are not going to stay in that same stage, that same mindset forever.” 

Peter Kapinos, vice president and head of workplace and investment marketing at Empower, presented data that was collected from one million participants whose accounts are recordkept by Empower and exemplified how participants’ savings rates lined up with their level of engagement.  

For example, for those who were defaulted into a target-date fund and were unengaged (rarely visiting the portal or using the call center), their average savings rate was around 4.9%. In comparison, for those who were defaulted into a TDF but were more engaged, their savings rate was around 7.3%, and those with a managed account had an average savings rate of 8.2%.  

“You need to get people to think about the 401(k), the 403(b) or the 457 in combination with the rest of [their] finances,” Kapinos said. “If we can get people to engage more, use more of the plan designs that you have … [it will result in] significantly better retirement outcomes.” 

On the Empower dashboard, Kapinos said participants can link accounts together and look at all their finances side by side. He said the average savings rate for participants on the Empower dashboard is 10.5%. 

“We see people who are linking accounts are saving 30% more than the people who have not taken advantage of those types of tools,” Kapinos said. 

Kelli Send, principal and senior vice president of financial wellness services at Francis LLC, noted that there are currently four generations in the workforce, and as a result, it is critical to develop engagement methods around these different age groups. For example, she said only using email communication is not effective, as younger participants are less likely to pay attention to mass emails. 

However, she said home mailings are often effective, particularly because the employee may not be the “treasurer in the family,” but rather the employee’s spouse or partner could be the person managing finances in the household. As a result, home mailings might be a better way to communicate with participants and their partners.  

“We’ve also got a lot of people that are very into videos,” Send added. “We’re doing a ton of YouTube-style videos to communicate … it doesn’t have to be an hour-long group meeting. It can be very short and sweet.” 

In addition, Send said another effective strategy is creating incentives. For instance, she said Francis conducted a campaign called “Sock It Away” where if participants increased their savings by 1%, they received a pair of funky socks. Send has also found success with allowing participants to use wellness points to reduce their health care costs. 

Lastly, she said it is important to get senior managers to attend education meetings.  

“If you have a hard time getting folks to come to voluntary meetings, when they see a senior manager walking down the hallway to go that meeting, trust me, they’re noticing,” Send said. “That makes a huge difference.” 

Barnes said trying to engage younger participants can be challenging, as they are not seeing the instant value in saving for a future that may seem far away.  

“If their parents never talked about [saving], then they’re not evening thinking about this,” Barnes said. “If they don’t learn about [saving] in school … they’re coming in a little more immature before they even start, and [they] have decades before they actually see the value of everything they’ve been saving for.” 

Barnes said giving participants nudges that tell them they are on the right track and that they should be proud of the progress they have made can help transition people from feeling anxious about retiring to feeling more excited about retirement and saving as a whole.   

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