Social Security is a critical source of income for many of the nearly 42 million retired workers receiving a monthly benefit check. Data from the Social Security Administration shows that more than three in five retired workers receiving benefits relies on their monthly check to account for at least half of their income. Without that income, we'd probably be talking about millions of additional senior citizens living below the poverty line and struggling to make ends meet.

Of course, this vital program for tens of millions of retirees is also a source of frustration and angst. According to the latest annual report from the Social Security Board of Trustees, the program is on track to burn through its nearly $3 trillion in asset reserves by 2034, which is the same forecast as issued in its 2016 report. Should Social Security burn through this excess cash, an across-the-board cut in benefits of up to 23% may be needed to extend the solvency of the program through the year 2091. It's not a particularly rosy outlook for those who rely on Social Security to make ends meet.

A Social Security card mixed in with a pile of cash.

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The purchasing power of Social Security benefits is shrinking

Yet this is far from the only issue that seniors are facing. In addition to an imminent crossroads for Social Security in 2034, seniors are also contending with less-than-spectacular cost-of-living adjustments, or COLA. COLA is the "raise" that Social Security beneficiaries receive most years that accounts for inflation.

In a perfect world, seniors receive an increase in their monthly payout that's commensurate with the aggregate inflation that they're facing. Unfortunately, reality is nothing close to the "perfect world" example. For instance, over the past eight years, COLA has totaled 0% three times, and just 0.3% for 2017, the lowest increase on record. This means that while seniors are receiving very little in the way of Social Security "raises," the cost of housing and medical care continues to rise. In fact, not counting 2017, medical care inflation has outpaced Social Security's COLA in 33 of the past 35 years. In other words, the purchasing power of Social Security benefits is shrinking.

A senior citizen holding out a pile of cash in her hands.

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The Board of Trustees predicts a 2.2% COLA for 2018

The inflationary tether that helps determine how much of a raise seniors will receive from one year to the next is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The average reading for the third quarter of the previous year (July through September months) serves as the baseline figure, while the average reading from the third quarter of the current year acts as the comparison. An increase in the CPI-W year over year is passed along to beneficiaries as a percentage and rounded to the nearest 0.1%. A decrease in the CPI-W year on year, which has happened three times since the Great Recession, leaves benefits static. Thankfully, Social Security benefits can't drop because of deflation.

Last month, the Social Security Board of Trustees projected that the CPI-W was on track to gain 2.2% this year. Should 2.2% be the final COLA for 2018, it would be the largest increase beneficiaries have seen in six years. 

A senior women buying groceries.

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Not so fast! 2.2% may be wishful thinking.

However, if I were a Social Security recipient, I wouldn't go counting those chickens just yet. According to the July inflation data release from the Bureau of Labor Statistics (BLS) on the morning of August 11, the CPI-W wound up dropping another 0.1% on an annualized basis to a rate of 1.6% for the 12-month period. 

Again, it's worth pointing out that these figures do regularly change from month to month. However, it's also hard to ignore that the Consumer Price Index for all Urban Workers (CPI-U), a similar measure to the CPI-W, has fallen in every month but one since February and has regularly come in below economists' expectations over that time span. In essence, lower inflationary figures could spell yet another subpar COLA for seniors come 2018.

Why the lag in inflation? According U.S. city data provided by the BLS for the CPI-U, food and energy have been the inflationary saviors, with unadjusted trailing-12-month inflationary increases of 1.1% and 3.4%, respectively. On the other hand, new and used vehicle sales and apparel have dragged down the CPI-U.

With the average retired worker bringing home $1,368.67 a month in June 2017, according to the SSA, a 2.2% COLA would translate into an extra $361.33 a year in 2018, or $30.11 a month. But if the current 1.6% increase, based on the July BLS reading, were to hold, seniors would get only an extra $21.90 a month, or $262.78 next year. All the while, the cost of medical care commodities is up 3.7% over the trailing-12-month period, according to BLS data.

A senior man staring out a window.

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Seniors needs more, but the program can't afford more

A recent history of low or nonexistent COLAs touches on a pretty big issue for Social Security. Seniors needs larger COLAs to more accurately reflect the medical-care inflation and housing expenditure costs they're facing relative to younger working Americans. Yet these younger workers help define inflation for the CPI-W.

One proposal that's made its rounds in Washington is the idea of replacing the CPI-W with an inflationary measure that focuses strictly on households with seniors: the Consumer Price Index for the Elderly (CPI-E). With added emphasis on medical care and housing expenses, and lower emphasis on other spending categories like education, apparel, and entertainment, the idea is that the CPI-E would get seniors a bigger annual COLA by focusing more specifically on their financial needs. And there's little argument that seniors need larger annual COLAs.

However, there's that little problem of Social Security's imminent budgetary shortfall of $12.5 trillion between 2034 and 2091. Adjusting to the CPI-E from the CPI-W would mean burning through the existing asset reserves even faster and putting the program on a more imminent collision course with possible benefit cuts.

Congress clearly needs to do something before it's too late.

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