Whether we're talking about current or future retirees, it's all the same: Ultimately, you have a far better chance than not of being reliant on Social Security, in some capacity, during your golden years.
Two separate but similar polls from Gallup in April demonstrate this reliance. When questioning existing retirees who are receiving a benefit, 57% noted that the program represents a "major" income source, whereas 33% opined that it was a "minor" source. This means 90% of current retirees need Social Security to make ends meet, whereas a mere 10% aren't leaning on it as a source of income.
Gallup also questioned nonretirees on their expected reliance once they hang their work gloves up for good. Overall, 84% of future aged beneficiaries expect to lean on Social Security, 30% of which believe they'll do so pretty heavily, and 54% of which will rely on the program as a minor source.
The most anticipated Social Security decision of the year
Because of the role Social Security has played for decades, and will continue to play for numerous future generations, there's perhaps no single event that beneficiaries find more important than the annual cost-of-living adjustment (COLA) announcement in mid-October. COLA is just a fancy way of identifying the inflationary "raise" that beneficiaries will receive in the upcoming year.
Why mid-October? To begin with, inflationary data from the preceding month isn't usually released by the Bureau of Labor Statistics until nearly the midpoint of the following month.
But the big reason is that only three months of Social Security's inflationary tether -- the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- is taken into consideration when determining the program's annual COLA. The average reading from the third quarter of the previous year (July through September) acts as the baseline reading, while the average reading from the third quarter of the current year is the comparison. Thus, beneficiaries have to wait until mid-October to find out what sort of raise they'll be getting in the upcoming year.
If the CPI-W rises in value from the previous year, then beneficiaries receive a raise commensurate with the percentage increase, rounded to the nearest tenth of a percent. Comparatively, if prices fall year over year, as they did in 2010, 2011, and 2016, benefits remain static in the following year.
The one thing you have to understand about Social Security's COLA
While beneficiaries would like to think that the CPI-W does a great job of accounting for the rising prices of goods and services, and thusly passes along an accurate COLA each year, one thing you should be aware of is that this rarely happens. According to an analysis from The Senior Citizens League, the purchasing power of Social Security dollars has declined by 34% since 2000, through January 2018.
How is it possible that seniors are getting shortchanged so badly by a recognized measure of inflation? The answer lies in the name of the measure: "The Consumer Price Index for Urban Wage Earners and Clerical Workers." Note the emphasis -- that was added by me to denote that the spending habits across eight major categories of working-age urban and clerical workers are what determine Social Security's annual COLA, not the spending habits of retired workers, which make up close to 70% of total beneficiaries.
How does this affect seniors' pocketbooks? Well, for starters, it means that important expenditures for aged beneficiaries, like medical care and housing, tend to be underrepresented since these costs aren't as high, as a percentage of total expenditures, for urban and clerical workers.
On the flipside, it also means that less meaningful costs to seniors, like education, apparel, and transportation, have added weighting, which does them little good.
A bit confusing, right? Obviously, with the disabled, survivors of deceased workers, and select family members of retired workers also covered by Social Security, no inflationary measure is going to be perfect. There's always going to be some subgroup that doesn't have their expenditures properly accounted for. But given that Social Security was designed, first and foremost, to lay a financial foundation for retired workers during retirement, it's surprising (to say the least) that the inflationary measure used for more than four decades is one that doesn't do a very good job of keeping up with the true inflation seniors are facing.
There's a "fix," but it has two sizable drawbacks
I bet you're probably wondering if there's a way to resolve this inflationary issue -- and there is. The Consumer Price Index for the Elderly (CPI-E) is an inflationary measure that a number of Democrats have favored using in place of the CPI-W. It would take into account the spending habits of households with persons aged 62 and over, and therefore be a much more accurate representation of the inflation that aged beneficiaries are currently facing. In other words, it would mean a higher annual COLA in most years.
However, like all measures of inflation, the CPI-E has its drawbacks. Two, to be precise.
First, even with an added focus on the expenditures of seniors, the CPI-E still negates some important items that aged beneficiaries contend with, such as Medicare Part B premiums. Without properly accounting for medical care expenses, it's highly likely that even the CPI-E could lead to an underreporting of the actual inflation seniors are contending with (albeit, it would narrow the current underreporting associated with the CPI-W).
The second problem is that Social Security is facing an imminent cash crunch, according to the latest Social Security Board of Trustees report. With its current payout schedule unsustainable, the program is expected to exhaust its asset reserves by 2034 and run a $13.2 trillion deficit between 2034 and 2092. If the program were to suddenly switch to the CPI-E, it would likely increase annual COLAs, and therefore speed up the process by which Social Security's asset reserves are drained, thus putting Social Security in an even deeper hole than it's already in.
There is no simple fix for COLA at the moment, which means current and future beneficiaries should be prepared to see the purchasing power of their Social Security income decline for the foreseeable future.