Social Security is, for many Americans, a vital source of retirement income. According to the Center for Budget and Policy Priorities, just 8.8% of seniors currently live in poverty compared to an estimated 40.5% that would be living in poverty if Social Security didn't exist. This vital source of income is also counted upon by better than 3 in 5 retired workers to comprise at least half of their monthly income during their golden years.
But, as many are probably aware, Social Security is in trouble, and it's going to need some T.L.C. from Congress at some point over the next two decades.
According to the 2016 report from the Social Security Board of Trustees, the program is slated to burn through its trillions of dollars in excess cash by the year 2034. If Congress is unable to come up with a way to close Social Security's imminent budgetary shortfall, benefit cuts of up to 21% may be needed for current and future beneficiaries. This is a worrisome scenario considering just how many current and future retirees expect to lean heavily on the program.
Seniors are becoming concerned regarding Social Security's COLA
Yet this is far from the only concern for seniors. One of the bigger worries for current and future recipients is how Social Security will account for inflation. In other words, as the costs of goods and services increase, how will the Social Security Administration respond in terms of doling out cost-of-living adjustments (COLA), or "raises"?
Currently, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is what determines the annual COLA for Social Security recipients. The average CPI-W reading from the third quarter of the previous year serves as the baseline, while the average CPI-W reading from the third quarter of the current year is the basis for change. If the prices of the goods and services that the CPI-W measures across a wide swath of industries has declined, then no COLA will be given to beneficiaries. Retirees receiving Social Security benefits have suffered through three years since 2009 where there's been no COLA. But if the CPI-W increases, beneficiaries receive a commensurate "raise" that's rounded to the nearest 0.1%.
However, the CPI-W appears to have a fatal flaw: it doesn't do a great job of representing the spending habits of seniors. A Dec. 2011 analysis from the U.S. Bureau of Labor Statistics found that medical care expenditures are considerably higher for seniors as a percentage of their spending than for working Americans. Likewise, more money was spent on housing costs for seniors than working Americans. Conversely, the CPI-W places greater emphasis on transportation, education, entertainment, apparel, and food costs than what seniors typically spend. The result? In 33 of the past 35 years medical care inflation has outpaced Social Security's COLA.
Chained CPI or CPI-E?
In 2017, Social Security recipients were privy to the smallest COLA on record -- a raise of 0.3%, which worked out to just over $4 extra per month. The lack of commensurate COLAs while medical care costs are rising has caused some seniors and workers to call for change.
One possible fix was proposed by in December by Rep. Sam Johnson (R-TX), the chairman of the Ways and Means Social Security subcommittee. One of the many proposals accompanying Johnson's Social Security Reform Act of 2016 suggests swapping out the CPI-W for the Chained CPI when calculating Social Security's COLA.
The Chained CPI is very similar to the CPI-W, save for one big difference: substitution. The Chained CPI takes into account the idea that if the price of a good or service increases too much, the consumer will respond by trading down to a cheaper good or service. The CPI-W doesn't take this into account; therefore the Chained CPI would be expected to dole out "raises" at a lower rate than that of the CPI-W. Projections from the Social Security Administration have suggested that moving to the Chained CPI would eliminate 19% of the program's estimated budgetary shortfall. On the other hand, it would reduce the benefit increases for current and future beneficiaries.
The other solution that's been suggested is swapping out the CPI-W for the Consumer Price Index for the Elderly (CPI-E). The CPI-E only takes into account the spending habits of households with persons aged 62 and up. The idea of the CPI-E is that it would better represent the spending habits of seniors and factor in those aforementioned higher medical and housing costs that the CPI-W fails to account for.
The great news with the CPI-E is that it would result in a higher average monthly payout for beneficiaries. According to The Senior Citizens League, if the CPI-E were used in place of the CPI-W over the past 25 years, Social Security recipients would have averaged an increased annual payout of 8.9%, or nearly $30,000. The downside? The CPI-E means pulling even more money out of the Social Security Trust for monthly benefits, which means draining the Trust's excess cash even faster. The CPI-E also fails to take into account Medicare Part A expenses, which can make up a large component of medical care costs for seniors.
The surprising choice of the people
If given the choice, which measure would the people choose to tie COLA to? This was the question posed in the "Voice of the People" survey. Needless to say, the answer was a complete shock.
First, the Voice of the People survey presented each argument (e.g., pro Chained CPI vs. con Chained CPI) and allowed respondents to state how convincing the thesis for each argument was. When it came to the Chained CPI, 63% of respondents found the "pro" argument very convincing or somewhat convincing, while 71% found the con argument to be very convincing or somewhat convincing. Among the very convinced, the con (34%) doubled the "pro" (17%). This result isn't too surprising considering that the Chained CPI would actually reduce annual COLAs.
Next, the Voice of the People survey questioned respondents in the same format, pro vs. con, with regard to basing COLAs on what the elderly buy. Also not surprisingly, 80% of respondents found the "pro" argument to be very convincing or somewhat convincing, whereas just 57% found the "con" argument very convincing or somewhat convincing.
However, putting all choices together led to an interesting response. Overall, 25% of respondents believed annual COLAs should continue to be based on the CPI-W. But 33% of respondents chose the Chained CPI, compared to only 29% for the CPI-E. Even accounting for the 1.4% margin of error in the study, a slightly larger number of respondents would prefer the Chained CPI be used to calculate COLAs as opposed to the CPI-E. That's shocking!
Don't expect change anytime soon
In spite of a number of exciting COLA options, I believe it'd be wise for current retirees, as well as future retirees, to discount the idea of altering how Social Security's COLA is calculated anytime soon. Even though Republicans have a majority in both houses of Congress, President Trump made a pledge during his campaign not to touch any of the specifics tied to Social Security. If Trump and his Republican peers wants to keep from angering seniors, they'll probably leave the program as is.
Long story short, don't expect change anytime soon, but don't throw the idea of changing how the COLA is calculated completely out the window.
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