As the calendar turns to October, Social Security recipients are eagerly awaiting the 2023 cost-of-living adjustment (COLA). Many seniors have been struggling under the weight of this year's high inflation, even as some costs, such as gas prices, have come down in recent months.

Experts are now expecting an 8.7% raise for seniors in 2023. The final figure will be determined by the July, August, and upcoming September Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-W is related to the traditional CPI-U, but with slightly different weightings. Fortunately, the CPI-W looks to be slightly more generous than the CPI-U this year.

But is the CPI-W really capturing the costs most seniors bear? Some politicians say no and are proposing using an even more generous metric.

Older man with calculator at desk.

Image source: Getty Images.

COLAs haven't kept up with real costs to seniors

According to an ongoing study by The Senior Citizens League, a nonpartisan Senior advocacy group, true costs of living for seniors have risen much more than COLAs as calculated by the CPI-W. Between 2000 and March 2022, the study found that while costs to seniors rose a cumulative 130%, Social Security payments rose only 64%. That amounts to a 40% decline in buying power over that time.

The big difference comes down to higher Medicare premiums and out-of-pocket medical expenses seniors pay, which are not captured to the same extent by the CPI-W. Seniors 65 and older typically pay more than twice as much on medical care as the general population.

Medical costs have been especially problematic of late. In the most recent August CPI report, medical services inflation rose 0.8% month over month, accelerating over July, and was one of the main factors behind the higher-than-expected CPI last month. The main culprit is rampant nursing shortages and resulting wage inflation, probably a consequence of the stressful pandemic.

Meet the CPI-E

There are currently several proposals bouncing around Congress to address this issue, all from Democratic lawmakers in the House and Senate. While details differ, one thing they have in common is that each bill proposes replacing the CPI-W with the Experimental CPI for Americans 62 Years of Age and Older, or CPI-E.

The CPI-E came out of a 1987 amendment to the Older Americans Act of 1965, whereby Congress directed the Bureau of Labor Statistics to calculate average annual cost increases for Americans 62 and up. The BLS then began studying data going back to 1982 and has made CPI-E calculations ever since. Between 1983 and 2021, the CPI-E rose at a 2.8% annualized rate, compared with a 2.6% rate for the CPI-W. While the CPI-E isn't higher every single year, that annualized average gain adds up to a very significant difference when compounded over nearly 40 years.

Why isn't the CPI-E used already, and why is it called "experimental?"

For one, the CPI-E uses a smaller sample than the CPI-W, since the 62-and-older population is smaller than the general population. Seniors' idiosyncratic spending habits also vary widely and are somewhat difficult to track. So the CPI-E could have a larger room for error.

Second, since the CPI-E study was only commissioned in 1987, there needed to be some passage of time before the long-term trajectory of the CPI-E versus the CPI-W became apparent.

Finally, since Congress was already using the CPI-W, it would take politicians changing the law in order to increase benefits. That's difficult to do, especially since Social Security is already running into funding problems. Currently, the Social Security Administration projects the program will run out of money in 2035.

Several Democratic lawmakers are proposing fixes today

Three recently proposed Democratic bills, including the Social Security Expansion Act, the Protecting and Preserving Social Security Act, and the Social Security 2100 Act, are now making their way through Congress. Each differs in certain ways, but all have two things in common. First, each proposes larger benefits, including replacing the CPI-W with the CPI-E. Second, each proposes raising payroll taxes on wealthier Americans to fund the increased benefits and extend the life of the program. Currently, Americans pay payroll taxes on only the first $147,000 of income. All three bills would raise that cap to varying degrees.

Social Security recipients as well those in their late 40s and 50s who will soon have to deal with the funding gap should closely monitor the progress of these bills in Congress. Given that this is a midterm election year, those concerned should research where your representative and senator stands on this important issue as well.