Three point six percent -- that’s the raise you will see in your Social Security check come January, according to the Bureau of Labor Statistics (BLS). This will be the first increase since 2009. You may have heard reports that your Medicare B premiums will also rise, to the point they virtually wipe out your 3.6 percent raise. But the premium hike is being held down to about one-third of what it was supposed to be, and will only suck up a small bit of the raise, leaving you with a net increase of about 3.3 percent.

The raise is calculated based on the Consumer Price Index (CPI), which is a measure of inflation, though not necessarily the inflation that most affects seniors. Here’s an overview of how this works:

The CPI is based on a “market basket” of items and the change in prices of those items over time. Throughout the year, representatives call retailers and service providers to check the prices of thousands of items to keep track of the changes. Then, every September, the pulse of inflation is taken by comparing that month’s prices on the same items to what they were the previous September. For 2010 and 2011, no significant changes were detected. That’s why there was no increase in your benefits. Of course, if you are trying to get by on Social Security you probably noticed that your dollars were not going as far as they did before. So how is it that the government said “no inflation, no raise?” Good question!

A Flawed System

One major criticism of how the CPI is measured is that it does not accurately reflect what older people buy. In general, it reflects the purchases of a much younger population. There are actually a variety of consumer price indexes. The one that measures what the elderly buy is labeled the CPI-E. But the one that the government uses to change your Social Security benefits is the CPI-W.

What population does the CPI-W track? It tracks the purchases of “Urban Wage Earners and Clerical Workers.” To be more specific, the CPI-W records the purchases of people who get at least half their income from clerical work or other wage jobs, and where the workers were employed for at least 37 of the previous 52 weeks.

Other Flaws

In addition to the fact that most seniors do not fit the population that is tracked by the CPI-W, purchasing decisions in America have changed for most everyone, and those changes are not taken into account. For example, these days:

• Consumers are mobile and will shop around depending on where they can save the most money, rather than remain loyal to one retailer.
• Stores engage heavily in short-term sales in order to woo customers. Those price dips skew the data that is reported to the CPI evaluators.
• When prices rise too much, consumers often substitute one product for another. For example, if an orange crop fails and the price of orange juice soars, shoppers may opt for apple juice until orange juice becomes affordable again.
• New products, like the latest cell phone tend to cost much more when they first come on the market, and then decrease over time.

How Do Senior Purchases Differ from the General Population?

As noted earlier, the consumer price index that measures what seniors buy is the CPI-E. It takes into account the way seniors shop compared to the way the younger population shops. Here are some key differences:

• Housing. Rental rates are part of the measurement of overall inflation. However, most households of people age 65 and older are owner-occupied, with paid off mortgages, so rental rates don’t have much bearing on what seniors in general pay. The housing costs that seniors are sensitive to are homeowner insurance and property tax, neither of which used to measure inflation.
• Shopping outlets. Prices for the consumer index are checked at retail outlets on a random basis. But seniors are less likely than others to go to giant warehouse stores and purchase family-sized items. They are also less likely to shop online, and more apt to purchase by mail order
• Location. The CPI measures prices in 87 geographic regions. But the elderly population is concentrated in certain areas, such as Florida and Arizona.
• Medical care is a larger part of the expenses for older people than for younger, but various factors blur the lines when it comes to tracking actual price increases. Just about everyone at least 65 years old is covered by Medicare A or Medicaid, and Medicare D pays for part of prescription drug costs.

All of these elements greatly affect what seniors actually pay on a daily basis, yet none of them are part of the measurement that is used to set the cost of living increase (or lack of it) that seniors are expected to live by.

The Bureau of Labor Statistics freely admits that the way inflation is measured has many flaws. The methodology no longer mirrors the way any of us shop, and though it sets the level of your Social Security raises, it bears little resemblance to your actual expenditures. The BLS is working to improve the process, but don’t expect change any too soon. As the saying goes, the wheels of government grind slowly.

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.