It's hardly a secret that inflation has been soaring for roughly a year. These days, the cost of everything from groceries to gas to apparel is higher than it's been in years, and many people are struggling to keep up.
That extends to seniors -- especially those who get the bulk of their income from Social Security. This year, Social Security recipients received a 5.9% cost-of-living adjustment, or COLA, back in January. The purpose of that raise was to help them maintain buyer power in the face of rampant inflation.
But based on recent inflation levels, that 5.9% raise is already falling very short. And that's not surprising.
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Seniors on Social Security have been steadily losing buyer power for years, despite the COLAs they've been receiving. And a big reason for that boils down to the way COLAs are calculated.
A more appropriate means of calculating COLAs
Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Because we're only days into the current-year's third quarter, we don't yet have enough data to determine what 2023's Social Security COLA will look like. But experts are already saying it could be huge.
In fact, the nonpartisan Senior Citizens League recently estimated that next year's COLA could amount to 8.6%, which would make it the largest raise for beneficiaries in decades. (Incidentally, other estimates have come in even higher.) But will an 8.6% COLA suffice in 2023? There's a good chance it won't, especially if inflation keeps soaring.
Unfortunately, Social Security COLAs have a long history of failing to help seniors keep up with living costs. But changing the way they're calculated could help seniors manage better financially.
In fact, a number of lawmakers are pushing to use a different measure than the CPI-W to calculate COLAs -- the CPI-E, or Consumer Price Index for the Elderly. The main difference is that the CPI-E would better account for costs that are more specific to seniors, as opposed to the CPI-W, which relies heavily on measures like gas costs that may not be such a significant expense for retirees who aren't working.
To be clear, switching over to the CPI-E won't automatically guarantee a larger COLA for 2023 or for any year in the future. But what it should do is help ensure that buying power for Social Security recipients doesn't erode over time.
Had the CPI-E been used to calculate this-year's COLA, for example, it would have amounted to 4.8% instead of the 5.9% seniors received. But the CPI-E has also, historically speaking, risen faster than the CPI-W. And making that switch could ultimately result in more generous COLAs and better buying power for seniors, even if there are years here and there when the CPI-E lags behind the CPI-W.
Of course, right now, switching over to the CPI-E is only a proposal. But it's one that's been gaining traction. It will be interesting to see if lawmakers manage to push this change forward.
