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Social Security Has "Cheated" Seniors Out of $15,258 Over the Past Decade

By Sean Williams - Oct 18, 2019 at 6:06AM

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The purchasing power of Social Security dollars is falling at an alarming rate, a new analysis finds.

In case you missed it, Social Security's most anticipated announcement of the year happened last week.

On Thursday, Oct. 10, the U.S. Bureau of Labor Statistics (BLS) released inflation data from September, which happened to be the final puzzle piece needed to calculate Social Security's cost-of-living adjustment (COLA) for 2020. When the news release crossed the wire, we learned that the program's nearly 64 million beneficiaries will receive a 1.6% "raise" in the upcoming year. That's about $24 a month extra for the average retired worker.

However, this doesn't tell the full story of Social Security's COLA -- which, over the past decade, has cost seniors a lot of money.

A senior man counting a fanned pile of cash in his hands.

Image source: Getty Images.

The CPI-W is inherently flawed

Social Security's COLA has been determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, since 1975. This is an index with eight major spending categories and countless subcategories, each of which has a predetermined weighting that allows the BLS to express aggregate inflation in one simple and concise number each month. When it comes to Social Security's COLA, only the readings from the third quarter (July through September) factor into the calculation.

The problem is that the CPI-W does an awful job at representing the true inflation that seniors are facing. That's because, as the name of the index implies, it's measuring the spending habits of urban and clerical workers, many of who aren't 62 or older, or receiving a Social Security retirement benefit. In short, urban and clerical workers spend their money very differently than senior citizens do.

Although apples-to-apples comparisons are hard to come by, the BLS did compare expenditures using the CPI-W and an experimental index known as the Consumer Price Index for the Elderly (CPI-E) in December 2011. The CPI-E measures the spending habits of households with persons 62 and older.

What the BLS found was that CPI-E spending on medical care was double that of the CPI-W, with housing costs also notably higher. This tells us that the CPI-W is regularly underweighting the true inflation seniors contend with in regard to medical care and housing costs, while granting higher weighting to categories that don't matter much, such as apparel and education. That's a big problem considering that more than 4 out of 5 Social Security recipients are at least 62 years old.

A Social Security card wedged between fanned cash bills.

Image source: Getty Images.

Seniors have lost a lot of purchasing power due to low COLAs over the past decade

According to a new analysis from The Senior Citizens League (TSCL), a nonpartisan organization that looks to defend the rights and benefits of seniors, extremely low COLAs over the past decade have cost retired workers a fortune. Whereas COLAs averaged 3% over the previous decade, the past 10 years have seen the average annual COLA dip to 1.4%. This includes three instances where no COLA was passed along in 2010, 2011, and 2016 due to deflation, as well as the lowest positive COLA in history -- a meager 0.3% increase in 2017. And then, last year, approximately half of all beneficiaries saw no real increase as Social Security's 2% COLA was gobbled up by increases to Medicare Part B premiums.

More specifically, Social Security policy analyst Mary Johnson at TSCL finds that the purchasing power of Social Security dollars has declined by 18% over the past 10 years. In dollar terms, Johnson notes that a retiree with an average benefit of $1,075 a month in 2009 has lost $15,258 in financial growth between 2010 and 2019 because of the aforementioned 1.4% average COLA, when compared with what a 3% average COLA would have delivered.

The loss of purchasing power is even more striking when looking back even further. Over the past two decades, what $100 in Social Security income used to buy for retired workers will now only purchase $67 worth of those same goods and services.

TSCL's analysis says that a COLA should not average lower than 3% in any year to lessen the drain of retirement savings on seniors, and in order to keep the elderly out of poverty. 

A Democrat donkey and Republican elephant squaring off atop the American flag.

Image source: Getty Images.

Congress agrees that the CPI-W stinks, but isn't doing anything about it

Perhaps what's most intriguing about Social Security's inflation issue is that Congress wholeheartedly agrees. Democrats and Republicans agree on virtually nothing when it comes to Social Security, but both parties firmly believe that the CPI-W fails to do a good job of accurately measuring the inflation that program beneficiaries face.

Unfortunately, that's where the agreement ends, and why nothing is being done about fixing Social Security's inflationary tether on Capitol Hill.

Democrats prefer replacing the CPI-W with the aforementioned CPI-E. In doing so, the belief is that COLAs would expand over time since the CPI-E would do a much better job of measuring the costs that are important to seniors. But Republicans aren't in favor of using the CPI-E, which is still considered to be an experimental measure in the eyes of the BLS.

Meanwhile, Republicans have proposed switching from the CPI-W to the Chained CPI. The Chained CPI takes into account the idea of substitution bias, whereby a consumer trades down to similar goods or services because of inflation (e.g., buying pork or chicken if ground beef prices rise). Though this is a real-world consumer reaction to higher prices, no other inflationary index accounts for substitution bias. Thus, switching to the Chained CPI would likely reduce the COLA -- and therefore purchasing power -- even more than under the CPI-W. That's not something congressional Democrats will stand behind.

Clearly, Social Security's COLA needs fixing. But what that fix will look like, or when it'll take shape, is anyone's guess.

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