According to the Social Security Administration, more than 3 out of 5 retired workers lean on America's most important social program to provide at least half of their monthly income. What's more, 34% rely on Social Security for practically all of their income (90% to 100%). Suffice it to say, Social Security's guaranteed monthly payout has played a critical role for decades in keeping elderly poverty rates low.

However, this isn't to say that Social Security recipients aren't facing challenges.

Dice and casino chips lying atop Social Security cards.

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Social Security benefits take a hit

To begin with, the entire program is facing a potential cash crunch within the next 16 years. Despite generating more revenue than the payments the Social Security Administration has made to beneficiaries since 1983, an estimated $3 trillion in excess cash could be completely exhausted between 2022 and 2034. Should this happen, and lawmakers on Capitol Hill fail to raise additional revenue, across-the-board benefit cuts of up to 23% may be necessary to extend payouts through the year 2091. This would be a major concern for those aforementioned retirees who lean heavily on their guaranteed benefit.

But an even more immediate concern for seniors is their ongoing loss of purchasing power via the annual cost-of-living adjustment, or COLA. In theory, Social Security's COLA is supposed to accurately represent the inflation -- i.e., the rising price of goods and services -- that recipients face each year. Unfortunately, the tethered inflationary measure for the program doesn't do a very good job of that.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), as the name suggests, keeps tabs on the spending habits of urban and clerical workers, who happen to spend their money very differently than seniors. And seniors comprise nearly 70% of the program's beneficiaries. Without getting adequate representation of their medical and housing costs, which for seniors tend to be much higher than for working-age Americans, COLA tends to be underrepresented for seniors. Since 2000, the purchasing power of a Social Security dollar has fallen by 30%, according to an analysis from The Senior Citizens League.

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The hold harmless provision is doing quite a bit of harm, new report shows

And this certainly isn't the end of seniors' woes.

A new report from The Senior Citizens League (TSCL) sheds light on another issue that's been dragging down Social Security income for retired workers: the "hold harmless" clause. 

Hold harmless comes into play when Medicare Part B premiums -- those that cover outpatient services -- rise at a quicker pace, in dollar terms, than Social Security's COLA. For example, if Social Security recipients get a COLA that works out to a $10 per month increase in their benefit, but Medicare Part B premiums were set to rise by $20 in the coming year, the hold harmless provision would kick in to limit the Medicare increase to the smaller $10 amount. What hold harmless does is prevent Medicare Part B premiums from rising by more than Social Security's COLA, which would otherwise cause Social Security benefits to drop. In the hypothetical example here, Part B premium increases would cap at $10 (the same increase as COLA).

On the other hand, the roughly 30% of seniors who are new to Medicare, aren't enrolled in Social Security but are enrolled in Medicare, or choose to be billed directly for their Medicare Part B premiums rather than having them deducted from their monthly Social Security payout would face the full brunt of any Part B premium increases.

Over the last eight years, the hold harmless provision has been triggered four separate times. That's because COLA was 0% in three years (2010, 2011, and 2016) and a meager 0.3% in 2017, which represented the lowest increase on record.

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COLA needs to double in order to be adequate

According to TSCL's latest analysis, this triggering of hold harmless is likely to continue in the years to come. In other words, Medicare Part B premiums are liable to rise at a faster pace than Social Security's COLA more often than not. While this does protect a majority of seniors in the years where it's triggered, playing catch-up in future years where COLA's are more robust can be just as painful.

Based on TSCL's findings, and that of Mary Johnson, the Social Security and Medicare policy analyst for TSCL, Social Security COLA's would need to double and Medicare Part B premium increases would need to be cut in half in order for seniors to receive adequate retirement benefits. That's a tall order -- and one that this Congress is unlikely to be able to meet.

One possible solution that's been floated around on Capitol Hill is the idea of switching away from Social Security's current inflationary tether, the CPI-W, and instead using the Consumer Price Index for the Elderly (CPI-E). As the name implies, the CPI-E would only factor in expenditures for households with persons aged 62 and over. This should more adequately factor in those higher medical and housing expenditures that seniors deal with relative to working-age Americans. The end result should be a more robust annual COLA.

The problem with such a solution is twofold. First, even switching to the CPI-E wouldn't perfectly factor in all of the costs that seniors face. For instance, it still wouldn't include Medicare Part A expenditures (hospital insurance), which for some seniors could be their biggest medical expense each year.

The other issue, as noted above, is that the program is already facing a cash crunch in 2034. By switching to the CPI-E, lawmakers would be providing a medium-term bump-up in benefits but would also be sacrificing the Trust's asset reserves, likely accelerating the excess cash depletion date.

This is no easy fix for Congress, or current and future retirees for that matter. But if these findings prove accurate, and Part B premiums continue to outpace Social Security's COLA, the purchasing power of benefits is set for many more years of decline.