For most seniors, there's simply no social program that's more important than Social Security.
A Gallup poll from 2015 found that nearly 60% of all current retirees relies on Social Security to be a major component of their monthly income, with another 30% counting it as a minor source. More recent data from the Social Security Administration confirmed these findings, with 61% of retirees counting on Social Security to provide at least half of their monthly income. If Social Security were to run into trouble, a majority of seniors would probably struggle to make ends meet during their golden years.
Unfortunately, that's exactly what could be happening to the 81-year-old program. According to the annual Social Security Board of Trustees report, America's most important Social program is on a collision course with a disaster of sorts. Beginning in 2020, Social Security will begin paying out more in benefits than it's receiving in payroll taxes, and by 2034, per the Trustees' estimates, the more than $2.8 trillion in spare cash the program currently has will be completely exhausted. If this were to happen and lawmakers haven't devised a plan as to how to raise additional revenue for the program, Social Security would essentially become budget-neutral and benefits could be cut as much as 21% across the board. Not exactly an ideal scenario for current and future retirees.
Social Security's 2017 COLA might be enough to buy you lunch
Aside from worrying about a potential benefits cut 18 years down the road, seniors are also coping with exceptionally low cost-of-living adjustments, or COLA. COLA is the "raise" that beneficiaries receive each year that keeps pace with inflation.
The Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, is the measure used to calculate annual COLA. The average CPI-W during the third-quarter of the previous year serves as the baseline, while the average third-quarter COLA in the current year decides whether Social Security beneficiaries get a raise. If the CPI-W increases in the current year from the prior-year period, seniors get a raise equal to the percentage difference. If the CPI-W falls, as it did in 2009, 2010, and 2016, seniors' benefits remain frozen. Thankfully a decline in the CPI-W can't reduce Social Security benefits.
Last week, the Social Security Administration announced the annual COLA following the release of September's CPI-W data. The year-over-year third-quarter comparison showed that beneficiaries will be receiving the smallest increase ever -- just 0.3%. Since the average Social Security recipient brought home $1,350.64 in August per the SSA, this 0.3% increase works out to a measly $4.05 extra per month for retirees, which is hardly enough to buy lunch these days.
You should also keep in mind that this nominal increase, on top of three 0% COLAs over the past eight years, means seniors have seen their benefits increase by just 9.1% since 2008. Meanwhile, AARP points out in its Rx Price Watch report that between 2005 and 2013 the cost for prescription drugs for elderly Americans has jumped by more than 170%. Yikes!
Is it time to consider adjusting how Social Security accounts for inflation?
With yet another year of disappointing inflationary increases on the way for retirees, the cries for reform are only likely to get louder. One of the more popular solutions among seniors is to consider adjusting how the SSA accounts for inflation altogether.
As mentioned, the CPI-W is the current measure used to determine COLA on a year-to-year basis. But the CPI-W has its drawbacks. Namely, it's a measure that gauges the spending habits of working Americans who often have different spending habits than our nation's seniors. Instead, some pundits have suggested that the Consumer Price Index for the Elderly (CPI-E), which factors in the spending habits of persons aged 62 and up, would be a more appropriate measure of inflation for Social Security benefits, especially since two-thirds of all Social Security beneficiaries are retired workers.
When examining the two measures of inflation, the CPI-E tends to put added emphasis on housing and medical costs. In fact, medical expenditures tend to be twice as high for seniors as they are for the average urban and clerical worker. In contrast, the CPI-W places more focus on entertainment, apparel, food, and education expenses. The belief is that an added focus on medical and housing costs will more accurately reflect the inflationary increases that seniors deal with on a year-to-year basis.
Unfortunately this isn't a perfect solution, either. Though the CPI-E would be presumably reflect seniors' spending habits better than the CPI-W, the CPI-W takes into account the spending habits of tens of millions of additional workers. You could say it is the most accurate measure of inflation because of the considerably larger size of its data pool.
Furthermore, switching how the SSA accounts for inflation from the CPI-W to the CPI-E only makes a small dent in the upcoming budgetary shortfall. Doing something is probably better than doing nothing at all, but additional solutions from lawmakers would be needed to fix Social Security beyond simply adjusting how inflation is calculated.
For the time being, it appears as if 2017 will be another challenging year for many of our nation's retirees.