Have you ever wondered just how important Social Security is to our nation's retired workforce? According to the Social Security Administration, over 60% of aged beneficiaries are currently relying on the program to provide at least half of their monthly income. Meanwhile, an analysis from the Center on Budget and Policy Priorities finds that more than 15 million retired workers are kept out of poverty as a result of their guaranteed monthly benefit check. Yeah, I'd say that's a pretty invaluable program.

Despite helping seniors, Social Security is also letting them down

Unfortunately, for as much as Social Security has done to financially support seniors over the past 78 years, since payouts first began, it's also letting seniors down.

Two Social Security cards partially covering a hundred dollar bill.

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Many of you are probably aware by now of the struggles that await Social Security in less than two decades. The newest Social Security Board of Trustees report, released in early June, projects that the program will pay out $1.7 billion more in benefits this year than it collects in revenue. This would mark its first net cash outflow in 36 years. Though this figure is relatively small next to the $2.9 trillion in excess cash the program has saved up since 1983 (the last time a sweeping overhaul of the program was passed by lawmakers), the magnitude of this net cash outflow is expected to balloon quickly in the years that lie ahead.

By 2034, all $2.9 trillion in asset reserves are forecast to be exhausted. If such a scenario comes to pass, and Congress is unable to come up with an amicable solution to raise revenue and/or reduce expenditures, a benefits cut of up to 21% may be needed to sustain payouts through the year 2092. With current retirees leaning on the program so heavily, such a cut could prove calamitous.

Loss of purchasing power is a serious under-the-radar issue

But a more under-the-radar issue that's been sapping seniors is the loss of Social Security's purchasing power. Or, in plainer English, the price of goods and services has been rising a lot faster than the annual cost-of-living adjustments (COLA) being passed along to beneficiaries.

According to a report released just over a month ago by The Senior Citizens League (TSCL), the purchasing power of Social Security dollars has plunged 34% between the year 2000 and January 2018. What could once buy $100 worth of goods and services can now only purchase $66 worth of goods and services.

Since 2000, TSCL added up the inflationary increases passed along as COLA to beneficiaries, as well as the inflation experienced by 39 popular items seniors need or commonly purchase. The result was a combined increase in COLA of only 46% over 18 years, and an aggregate increase for the 39 key items of... 96.3%! Based on what the average retired worker was earning in 2000 ($816 a month), they'd need an extra $410.30 a month over what they're currently receiving, based on that 46% increase since 2000, just to have kept pace with inflation for these 39 items.

A frustrated senior woman sitting next to a doctor that has a clipboard labeled with medical care expenses.

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These ten expenses have grown considerably quicker than Social Security's COLA

If there is a silver lining here, at least 13 of the 39 expenses examined by TSCL didn't grow at a faster pace than Social Security's COLA. Unfortunately, it also means that two-thirds of the expenses examined did, which resulted in the ongoing deterioration of beneficiaries' purchasing power.

In particular, TSCL listed the 10 items that had the highest rate of inflation over the past 18 years, through January 2018. These are:

  1. Medicare Part B monthly premiums: up 195%
  2. Prescription drugs (annual average out-of-pocket): up 188%
  3. Home heating oil (per gallon): up 181%
  4. Homeowner's insurance (annual cost): up 164%
  5. Medigap plans: up 158%
  6. Propane gas (per gallon): up 157%
  7. Real estate taxes: up 129%
  8. Total medical out-of-pocket expenses (national average for those aged 65 and over): up 117%
  9. Oranges (per pound): up 117%
  10. Pet services and vet expenses (annual): up 114%

With the exception of pet services and vet expenses, which were tabulated using data from the Consumer Price Index for All Urban Consumers, all other price data was available to TSCL. 

While some of these higher costs may have had limited impacts (after all, a person would have to buy a whole lot of oranges to truly break the bank), others have gouged a hole straight through seniors' pockets. Over 18 years, average annual out-of-pocket medical costs have soared more than $7,160, while homeowner's insurance and real estate taxes are up by a respectively $834 and $889, annually. That's $9,000 more in 18 years' time for the average senior that pays for medical care and owns their home. Ouch!

The word inflation being defined in a dictionary.

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The root cause of this lost purchasing power

How did things get so bad, you ask? The problem lies with Social Security's inflationary tether: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

As the name implies, this is an index that tracks the spending habits of urban and clerical workers. Typically, we're talking about working-age Americans, not retirees. Thus, the inflationary tether that's supposed to be offering an accurate picture of what's happening with the prices of goods and services is being measured based on what younger adults are buying, rather than aged beneficiaries, which make up around 70% of all recipients.

The result is that important expense categories like medical care and housing have less emphasis as a percentage of total expenditures for urban and clerical workers. Conversely, less important categories like communication, education, transportation, and apparel, get added emphasis under the CPI-W. This explains why seniors aren't getting an adequate raise each year.

Lawmakers loathe the CPI-W, but can't figure out an amicable way to fix the problem

Interestingly enough, neither political party believes the CPI-W is doing a good job of accurately measuring inflation. The problem is that Democrats and Republicans each have a solution on how to fix this issue, but those fixes are miles apart.

Democrats would prefer to introduce a new inflationary tether known as the Consumer Price Index for the Elderly, or CPI-E. As the name suggests, it would closely track the expenditures of households with persons aged 62 and over. Presumably, this would allow for a more accurate representation of medical care and housing expenditures, and lead to a beefier annual COLA.

The downside? The CPI-E still fails to take into account important costs, such as Medicare Part A and B expenses, which could lead to an underreporting of the medical care inflation seniors are contending with. Additionally, while a higher COLA would be great news for seniors, it could also more quickly drain Social Security's asset reserves, which are already strained.

A blue Democrat donkey and red Republican elephant butting heads.

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By comparison, Republicans would prefer to use the Chained CPI. The Chained CPI and the CPI-W are a lot alike, save for one big difference: substitution bias. The Chained CPI takes into account the idea that if a good or service becomes too pricey, consumers will trade down and substitute it for a cheaper good (e.g., trading down from beef to pork or chicken). The GOP believes this is the most accurate way to measure inflation since it involves a real-life consumer decision based on the cost of goods and services.

The downside here is that the Chained CPI would result in an even greater loss of purchasing power for seniors. Since no other indexes account for substitution bias, the Chained CPI tends to grow at a slower pace. Though this could actually prove to be a positive for Social Security by saving the program money over the long run, it would be a devastating hit to existing retirees.

I wish I could say there was a simple solution to Social Security's loss of purchasing power, but at this moment there's simply not. That means current and future retirees should expect costs to outpace their COLA far more years than not.