Are Workers’ Compensation benefits protected against the rising cost of living?

The cost of living (almost always) goes up year over year.  If your earnings aren’t keeping pace, something has to give.  In the short run, you might be able to carpool more, eat out less, switch to generic products, and maybe repair your old car rather than buy that new SUV.  In the long run, if the cost of living continues to outpace your earnings, you might have to take on a second (or third) job, downsize your home, move to a lower cost city, or go back to school so you can pursue a career with higher wages.   Those are some of the options… if you are able to earn an income.   

Workers with permanent disabilities often don’t have those options.  The monthly workers’ compensation amount they receive may have sustained them initially but unless it is adjusted for the cost of living, permanently disabled workers will see the buying power of their workers’ compensation income decline with each passing year.  Over time, savings may be depleted, debts incurred, and their health and welfare diminished—furthering the burden of their original work-related injuries. 

To forestall this eventuality, the majority of North American workers’ compensation jurisdictions adjust periodic payments (sometimes called workers’ compensation pensions or permanent disability payments) to account for increases in the cost of living.  This policy, however, is far from universal among US workers’ compensation systems.  A recent WCRI/IAIABC survey of Workers’ Compensation Laws (2016) recorded 27 US states with no cost-of-living escalator for permanent total disability cases. 

Consumer Price Index:  A common reference with many versions and unique calculation characteristics

The most common approach used by North American workers’ compensation jurisdictions that do adjust their payments for increases in the cost of living is to mirror the increases to federal entitlement plans such as US Social Security (USSS) and Canada Pensions Plan (CPP and parallel Quebec Pension Plan, QPP).   These near universal social insurance plans for retirement and disability benefits for working citizens provide a convenient standard for workers’ compensation policy makers designing cost-of-living adjustments (often abbreviated COLA).   

Both USSS and CPP increase benefits annually based on changes the Consumer Price Index (CPI) for their respective countries.  The method of calculation and exactly which components of the CPI are used differ.  There are technical manuals on CPI calculations; however, for workers’ compensation policy makers there are a couple of general comments that may provide insight into the use of CPI as an adjustment factor.

First, CPI is not one universal thing.  The standard definition of CPI refers to the change over time in the cost of a selected (but arbitrary) “basket of goods” in a base year.  The simple concept is more complicated than it sounds; a lot of detail goes into selecting and weighting items for that “basket of goods”.  Most versions include goods and services such as transportation, education, recreation, communications, and medical care.  Other real expenses that are excluded from the “basket of goods” [in Canada, at last] are real estate and life insurance.  And exactly whose basket we are considering can make a big difference.  What a young, urban couple with two kids in school has in their typical basket probably differs from a rural farm family or retired manager might consider typical.   The definition of what is in that basket and what proportion or weight goes to each category are also subject to change over time.  Think about communications, for example; with internet services and mobile data becoming essential utilities, it makes sense that they be included and their weight increased. 

The second point to remember about CPI is that there are often multiple versions of the CPI even within one country.  Variations include geographic subsets [regions, states, provinces, cities], versions that include all or just core items, and even versions that designed to reflect cost of living impacts on specific populations. In the US, for example, two main indexes are often cited for specific populations:  urban consumers [CPI-U] and urban clerical and wage earners [CPI-W].  Note that CPI-U covers most people including the unemployed and retired whereas the CPI-W is intended to reflect the impact of price changes on those working at least 37 weeks per year.  Both exclude rural consumers.    There are other CPI series including CPI-E for elderly.  Each has its uses and merits (as well as limitations and drawbacks).  Each series will produce different results.

Finally, the monthly CPI change is measured against a base year.  The base year for some CPI series or specific line items may differ from others or be changed over the time series in question.  Specifying which CPI, components, geographic location, and base year may be important to interpreting what a particular CPI value means.  Policy makers should be aware of the potential for such changes when designing a COLA based on CPI.

The following table provides how the selected CPI can yield different results based on geography:

Note that increases in each CPI series vary.  Over time, the differential can become significant.

The following US BLS table illustrates CPI All Items data, not seasonally adjusted

The base period is 1982-1984 so each table entry indicates a value relative to that base. Note that the values monthly almost always increase.  Whether comparing month over month values in a  row,  year over year values for months (quarters, half years or other ranges) in a column, you are likely to find examples where the CPI value declines. 

Using the CPI to adjust social insurance payments may be a common approach but it is far from perfect.  It applies defensible average weights to a range of items to derive an adjustment that may fall short of actual individual need or experience.  The converse may also be true; individuals may actually use a different basket of goods and experience less of an impact than the CPI would suggest. 

The selection of a particular CPI series should be intentional and explicitly justified.  For example, if the data show that virtually all recipients of benefits reside in a particular region, then that may become the policy justification for selecting a regional CPI.

Despite the imperfections and caveats, changes in CPI provide a strong indicator of cost pressure experienced by consumers in the real economy.  From a public policy perspective, CPI provides a useful reference against which to assess how well a social insurance program like workers’ compensation addresses the reality of the (almost always) increasing costs of living. 

CPI and Social Insurance:  How US Social Security and Canada Pension use CPI

For US Social security, the following summarizes how CPI increases are applied to the amount sent to beneficiaries:

Social Security COLAs are based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), updated monthly by the Department of Labor’s Bureau of Labor Statistics (BLS). The COLA equals the growth, if any, in the index from the highest third calendar quarter [July, August, September] average CPI-W recorded (most often, from the previous year) to the average CPI-W for the third calendar quarter of the current year. The COLA becomes effective in December of the current year and is payable in January of the following year. (Social Security payments always reflect the benefits due for the preceding month.)

If there is no percentage increase in the CPI-W between the measuring periods, no COLA is payable. No COLA was payable in January 2010, January 2011, or in January 2016.

- Social Security: Cost-of-Living Adjustments, Congressional Research Service, Updated November 19, 2018.

Note the actual application of USSS COLA evaluates changes in the CPI-W for the most recent third quarter and the previous highest third quarter.

Canada Pension Plan uses CPI data supplied by Statistics Canada to adjust CPP amounts once a year in January; rather than a single quarter of data, the calculation takes into account all monthly increases from the past year compared to the increases from the equivalent period the year prior.   The following chart shows the calculation method (see Government of Canada,  Canada Pension Plan Amounts and the Consumer Price Index):

The CPP increase is the percentage change from one 12-month period (November to October) to the previous 12-month period (November to October).  To calculate the 2019 CPP rates increase, a formula based on the average national CPI for all items for November 2017 to October 2018 is divided by the average CPI for November 2016 to October 2017 yields a 2.68 percent increase effective January 2019. 

Beyond the importance of understanding USSS and CPP use of CPI to develop their respective COLA for their plans, any statute that relies on the USSS or CPP COLA automatically rely on their respective calculation methods.  Workers’ compensation policy makers, for example, need to examine if the underlying assumptions and calculations of these social insurance plans make sense for the population of disabled workers receiving monthly compensation payments.

Workers’ Compensation jurisdictions:  Examples of policy implementations of COLA

Where workers’ compensation cases receive COLA adjustments, policy makers have had to make choices about how payment values should be adjusted.  The following are examples of how some jurisdictions have implemented their COLAs.

The Rhode Island workers’ compensation statute embodies the key elements in a COLA statute reliant on CPI by defining which CPI will be used, what time period will be referenced, the category of cases eligible and when the benefit will be applied:

RI Gen L § 28-33-17 (2017)  (f)(1) Where any employee's incapacity is total and has extended beyond fifty-two (52) weeks, regardless of the date of injury, payments made to all totally incapacitated employees shall be increased as of May 10, 1991, and annually on the tenth of May after that as long as the employee remains totally incapacitated. The increase shall be by an amount equal to the total percentage increase in annual Consumer Price Index, United States City Average for Urban Wage Earners and Clerical Workers, as formulated and computed by the Bureau of Labor Statistics of the United States Department of Labor for the period of March 1 to February 28 each year.

Virginia’s COLA escalator is based on the all items CPI each October 1 but because of the way Social Security disability payments are handled, the impact may be lower than the full CPI. In Virginia, the combined weekly compensation rate and weekly Social Security disability benefit cannot exceed 80% of claimant’s established pre-injury average weekly wage. Consequently, the application of the COLA is not automatic; it is subject to individual application and decision-making annually. 

Ontario’s workers’ compensation system, WSIB, recently improved its cost of living formula to fully reflect the Canadian CPI increase.   In January 2019, people receiving WSIB benefits will receive a cost-of-living adjustment of 2.3 per cent beginning on January 1.  The COLA escalator is automatic but wage loss benefits are offset by disability benefits a worker receives from CPP and QPP at a rate of 50%.  This partial integration or offset is common in workers’ compensation and disability insurance, although the degree of integration (and which benefit is reduced) varies.

British Columbia workers’ compensation pension recipients see indexation of their disability awards based on the following formula outlined in the Workers Compensation Act:

25   (1)For the purposes of this section, the Board must, as of January 1 of each year,

(a)determine the percentage change in the consumer price index for Canada, for all items, for the 12 month period ending on October 31 of the previous year, as published by Statistics Canada, and

(b)subtract 1% from the percentage change determined under paragraph (a).

(2) The percentage resulting from calculations made under subsection (1) must not be greater than 4% or less than 0%.

In practical terms, CPI change of 2.444614% less 1% results in a 1.444614% increase for most compensation recipients effective January 1, 2019. 

From a policy planning perspective, it is important to consider the longer-term impact of reduction policies.  For a 40 year old injured worker with a permanent total disability, the cumulative impact of the “less 1%” obviously increases over time.  Assuming just 2% CPI each year, the 1% reduction means that the purchasing power of each $100 awarded in 2002 will have grown after 10 years to $110.46 far short of the $121.90 necessary to meet the full increase in cost of living.  The difference increases with every passing year.  After 20 applications in this example, the adjusted value will have increased to $122.02 while full CPI would have increased that original $100 to $148.59. 

The geographic qualification to the definition of the CPI is fairly common.  Alberta’s WCB uses the change in the Alberta Consumer Price Index (ACPI) for 12 months, ending September 30   and applies the result in January of the following year.  Until a recent policy change to full ACPI, the ACPI amount was reduced by 0.5%.

While the trend is towards applying a full CPI increase to adjust for the cost-of-living adjustment, limits are often set in legislation.  The Yukon Territory uses the percentage change in the CPI for the geographic location of its capital, Whitehorse, calculated by comparing the 12-month period ending October 31st of the previous year with one year earlier, capped at a maximum of 4% and a minimum of 0%.

Which CPI to use is often an important determinant of the actual cost-of-living increase in other jurisdictions as well.  In Massachusetts, the increase is based on the CPI increase for the Northeast urban region.  In Saskatchewan, it is the percentage change in CPI for Regina and Saskatoon for the 12 months ending on November 30 of the previous year that determines the increase to be applied.  

Prince Edward Island combines a restricted formula that yields less than full CPI, a CPI geographic reference and a cap such that  extended wage loss benefits will be adjusted on July 1 each year by an  amount equal to the lesser of: 80% of the percentage change in the CPI [less than full CPI restriction] for Charlottetown and Summerside for all items [geographic reference] for December of the previous year and December of one year earlier and 4% [cap]. (see WCA s. 49.1(1.1)) 

One challenge with geographic or regional CPI considerations is that it may well under-reflect costs associated with individuals who relocate.  One can imagine a totally disabled worker in a rural setting wanting to relocate to a more urban centre where medical and support services are more appropriate and available to his or her need.  The relevance of a COLA based on a CPI indicator from where the injury occurred may be lost. 

Florida has a unique cost-of-living adjustment method.  According to the Social Security Administration:

Florida Workers’ Compensation does not provide for a traditional cost of living increase. However, individuals that are permanently and totally disabled are potentially eligible for a supplemental yearly increase of 3 percent. The increase is only payable for individuals under age 62 that are not subject to offset due to receipt of Social Security benefits. When the individual attains age 62, if they are eligible for Social Security benefits they lose entitlement to the supplemental benefits if the date of injury is on or after July 1, 1990. For injuries prior to July 1, 1990, the supplemental payments continue.

Not all jurisdictions use a version of CPI to adjust compensation payments.   Washington State’s Department of Labor and Industries uses a different method to calculate the cost of living increase.  In that state, most workers injured on or before July 1, 2017 will see time-loss and pension benefit payments increase by 5 percent based on the change in the state's average wage.  That increase was effective July 1, 2018.

Some jurisdictions apply the indexation to very restricted categories.  For example, in Connecticut, only permanently and totally disabled workers or those who have been totally disabled for a period of 5 years or more are eligible for a cost of living adjustment to their compensation. 

Reference frames, Application dates, Caps and floors

You may have noticed the reference range for calculating and applying a COLA varies.  BC and the Yukon use the year ending October 31, Alberta uses September 30, and PEI uses December 31.  The date of application also varies by jurisdiction:  July 1 in Washington state, and May 10 for Rhode Island.  While a period of time between the COLA reference period and its application is reasonable, the rationale for a lengthy delay should be explained.  When calculations were done by hand, a lengthy lag time was justifiable.  If systems are designed with COLA in mind, their routine application should allow a short period between the reference period for calculation and actual application of the COLA.

Most of the policies outlined in this paper use full year CPI data as the basis for their COLA.  This tends to smooth out seasonal variations.  Transportation costs tend to peak in the summer, fresh vegetable costs are lower in the harvest season.  Some CPI series are smoothed or seasonally adjusted; use of seasonally adjusted data should be justified and specified in a policy relying on such data.

Regardless of the CPI or other standard measure used to adjust workers’ compensation payments, policy makers may include limitations on the extent to which the indexation may be applied.  As noted above, several provinces including BC and Alberta cap the possible increase to a maximum 4%; many policies contain a floor of zero percent to prevent a negative percentage being applied should the COLA formula generate such a result.  Although rare, zero results have occurred. 

Accounting for the cost of living

Workers’ compensation legislators and policy makers have long acknowledged that “protection against the value-eroding power of inflation is necessary” [Burton, John F. Jr. [Chairman], Report of the National Commission on State Workmen’s Compensation Laws, US Government July 1972 chapter 3 page 71] for at least some categories of recipients.  In protracted recoveries, permanent disabilities, and compensation for survivors and dependents, that erosion can be substantial. Consider a disabled worker injured in 2002 and permanently disabled; using the “All Items CPI”, that worker will have seen an increase of more than 40% in costs of goods and services in the US or about 32% in Canada.   In most jurisdictions in North America, this worker will have received some cost-of-living adjustments.  In many jurisdictions, however, workers’ compensation payments will not have kept pace with the full increase in the cost of living.

To the best of my knowledge, there is no detailed study of the cost-of-living-adjustment mechanisms in workers’ compensation.  Aside from the WCRI/IAIABC survey, there are no studies that reflect current or at least recent policies in a comparative way.  Few jurisdictions post historical tables of past COLA increases in a convenient way (although WorkSafeBC and Rhode Island data tables were readily available on line).  

The indexation of workers’ compensation payments particularly for permanent total disability cases adds a significant value to the incurred cost of an injury.  That cost is reflected in premium values.  Workers’ compensation analysis that fail to account for compensation parameters such as COLA provisions may mislead readers. Many existing comparative studies of workers’ compensation premiums and claim costs exclude detailed information and cost implications of “system features” such as compensation rate, maximum insurable earnings, and COLA provisions from their analysis. Policy makers need to understand the cost implications of system features in interpreting comparative results and designing improvements to (or the addition of) their cost-of-living provisions.

Failure to include protection against the rising cost of living under-value the human and financial loss of work-related injury, diminish the value and adequacy of compensation as the years go by, and often externalizing costs to family, community and taxpayers through additional welfare and health costs.  

Work-related injury and death have real human and financial costs.  Workers and their families bear their share of both.  Permanent disability, survivor and dependent compensation payments offset some of the financial costs. To be clear, adding or improving inflation protection or cost-of-living adjustments may increase premiums—costs to employers; failing to do so, however, is an intentional policy choice to place an increasing share of the cost to workers, families and taxpayers.  That policy choice should be acknowledged, explicitly stated and justified… or abandoned.