The biggest day of the year for Social Security beneficiaries is now in the books.
This past Thursday, Oct. 10, the U.S. Bureau of Labor Statistics (BLS) reported inflation data from September, which, in turn, allowed the Social Security Administration to announce the cost-of-living adjustment (COLA) for 2020. Since a majority of retired workers generate at least half of their monthly income from Social Security, this yearly announcement is a big deal.
The purchasing power of Social Security dollars continues to dwindle
Unfortunately, this highly anticipated announcement has also earned the reputation of being something of a kick in the pants for retired workers, year after year. That's because Social Security's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), is inherently flawed, and as a result is hitting retirees right where it hurts: in their wallets.
According to an analysis from The Senior Citizens League, the purchasing power of Social Security income for senior citizens has declined by 33% between the beginning of 2000 and January 2019. Essentially, what $100 in Social Security benefits would have bought in goods and services in 2000 now only buys $67 worth of those same goods and services.
As the name of the CPI-W clearly states, the inflationary index that's been responsible for determining COLA since 1975 is geared to track the spending habits of urban and clerical workers. Urban and clerical workers are traditionally not seniors, and they rarely are receiving a Social Security benefit. Despite more than 80% of all Social Security beneficiaries being aged 62 and over, the inflationary measure that determines what sort of "raise" the program's nearly 64 million beneficiaries will receive is based on the spending habits of urban and clerical workers.
Suffice it to say that urban and clerical workers spend their money very differently than retired workers. More specifically, important expenditures, such as medical care and housing, are usually underweighted in the CPI-W, whereas a number of lesser-important expenditures, like apparel and education, garner extra weight. This leads to the ongoing disparity and loss of purchasing power that retired workers have contended with over the past two decades.
Lawmakers agree that the CPI-W is flawed, but can't find common ground to fix it
Maybe the real kicker of the COLA dilemma is that lawmakers on Capitol Hill are in agreement that the CPI-W isn't doing a very good job as an inflationary tether for Social Security. Yes, I did just say that Democrats and Republicans actually agree on something when it comes to Social Security. Of course, that's where the similarities end.
You see, each party has offered a proposal to resolve deficiencies presented by the CPI-W, but their approaches to fix Social Security's purchasing power dilemma come from opposite ends of the spectrum.
Democrats have proposed switching away from the CPI-W and using the Consumer Price Index for the Elderly (CPI-E) in its place. As the name implies, the CPI-E would factor in the spending habits of households with persons aged 62 and over. Since more than 4 out of 5 Social Security recipients are over age 62, such a move would seem logical, as well as do a better job of accounting for medical care and housing expenditures. Should the CPI-E be used in place of the CPI-W, various analyses suggest that annual COLAs would grow at a modestly quicker pace over the long run, compared to the CPI-W.
Meanwhile, Republicans favor the idea of the Chained CPI replacing the CPI-W. The Chained CPI takes the idea of substitution bias into account, which involves consumers trading down from one good or service to another, with price being the catalyst. For example, if the price of ground beef rises 50%, consumers might rightly opt to buy pork or chicken in its place. This is substitution bias in action. Since none of the other major inflationary indexes account for this trade-off, annual COLAs under the Chained CPI would be expected to decline over time, relative to the CPI-W.
As you might imagine, there are concerns with both plans. The CPI-E, for instance, is an experimental index, according to the BLS, and would need refinement before it's fit to be the program's inflationary tether. Further, the CPI-E fails to account for certain aspects of medical care costs, meaning it'll still be underweighting the actual medical care inflation that seniors are facing.
As for the Chained CPI, it's going to exacerbate the loss of purchasing power for retired workers, even if it represents a real-world consumer response to higher prices.
And, as the icing on the cake, neither party will cede an inch and find common ground with their opposition, meaning there's no chance of reaching the 60 votes in the Senate required to amend Social Security.
No matter what sort of COLA is passed along to beneficiaries, there's a good chance that they're going to continue to lose purchasing power over the long run.