Social Security is easily our nation's most important social program. According to an analysis from the Center on Budget and Policy Priorities, it's keeping more than 22 million people out of poverty each month, including 15 million-plus seniors, many of whom are reliant on their Social Security benefit check in some capacity to make ends meet.
Not surprisingly, given how much our nation's elderly lean on the program, there's no announcement that garners more attention than the annual cost-of-living adjustment, or COLA, during the second week of October.
The importance of cost-of-living adjustments
In simple terms, COLA describes the "raise" that all Social Security beneficiaries will receive in the upcoming year to account for the inflation (the rising price of goods and services) that they've contended with. Social Security's inflationary tether, which has remained unchanged since 1975, is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The CPI-W has eight major spending categories that are tracked, most of which have dozens upon dozens of subcategories that make up the inflationary index. For the sake of Social Security, only readings from the third quarter (July through September) matter. The average CPI-W reading from the third quarter of the previous year acts as the baseline, while the average reading from the third quarter of the current year is the comparison. If the measure rises (signaling inflation), then beneficiaries are in line for a raise in the upcoming year that's commensurate with the percentage increase, rounded to the nearest 0.1%.
Should the CPI-W fall from the previous year, which has happened only three times in more than four decades, benefits remain static from one year to the next. Thankfully, Social Security benefits cannot be reduced as a result of deflation.
Here's what the biggest COLA in seven years did for the average beneficiary
The second week of October is when the Bureau of Labor Statistics releases September's inflation data, which is the final piece of the puzzle needed to calculate COLA. Thanks to robust increases in crude oil prices, which led to substantial hikes in gasoline prices at the pump, along with healthy shelter inflation (e.g., rising rents), Social Security beneficiaries received a 2.8% raise in 2019, which is the largest COLA since 2012.
But what does a 2.8% COLA really look like for the average recipient of Social Security? Courtesy of new data from the Social Security Administration, let's take a look.
Having previously brought in closer to $1,420 a month, the average retired worker is now pocketing $1,461.31 a month, or $17,535.72 a year. Nearly 7 out of 10 Social Security recipients are retired workers, and roughly three-quarters of the $84.4 billion paid out by the program in December went to these retirees.
Disabled workers also saw a nice boost, with their average monthly benefit check now easily topping $1,200 at $1,233.70, or $14,804.40 for the full year. About $11.1 billion of what was paid out last month was directed toward disability insurance payments, with $10.5 billion going directly to disabled workers. The remainder headed to the children and/or spouses of disabled workers.
Lastly, the average survivor benefit leaped to $1,190.93 per month, or $14,291.16 annually. A wide swath of people are eligible for survivor benefits, including nondisabled and disabled widows or widowers, children of deceased workers, and widowed mothers and fathers. But none are taking home more on a monthly basis than nondisabled widows and widowers, with an average benefit check of $1,388.
This COLA has lost its fizz
While a 2.8% COLA might sound great and seeing the average Social Security benefit rise on paper may look good, the fact of the matter is that the measure designed to accurately record inflation, the CPI-W, is flawed.
As its name suggests, the CPI-W measures the spending habits of urban and clerical workers. That's a bit of a headscratcher since the majority of Social Security's payouts go to aged beneficiaries. And, as you can imagine, the spending habits of working-age urban and clerical workers aren't the same as senior citizens. The end result is that important expenditures to seniors, such as medical care and housing, tend to be underweighted in the CPI-W, with less important costs, like apparel, entertainment, transportation, and education, receiving a higher weighting. Essentially, the COLA that seniors are receiving isn't sufficient to cover the inflation they're actually facing.
Just how insufficient, you ask? A 2018 analysis from The Senior Citizens League found that the purchasing power of Social Security dollars had declined by 34% since the year 2000. Unless the CPI-W is replaced with a more accurate inflationary tether that takes into account the spending habits of seniors, this decline in purchasing power is likely to continue for many more years.
In effect, Social Security has an inflation problem with no easy solution.