Next month, Social Security will celebrate its 85th anniversary since being signed into law. For each of the past 80 years (payments began on Jan. 1, 1940), Social Security has been responsible for providing a financial foundation for our nation's retired workforce. In fact, it's singlehandedly responsible for pulling more than 15 million retired workers out of poverty each and every year.
But the Social Security program is also rife with problems and contending with more than a half-dozen ongoing demographic changes. According to the 2020 Social Security Board of Trustees report, the program is staring down a whopping $16.8 trillion funding shortfall between 2035 and 2094 -- and this unfunded obligation figure seems to grow with each passing year.
But demographic changes aren't the only worry for Social Security recipients.
Social Security's purchasing power has been slashed by 30% since 2000
You see, for the past two decades, the tens of millions of seniors receiving a Social Security retirement benefit each month have witnessed the purchasing power of this income dwindle over time. The Senior Citizens League, a nonpartisan group focused on advancing issues affecting seniors, found that the purchasing power of Social Security dollars has declined by 30% since the year 2000.
Given that the Social Security Administration has passed along cost-of-living adjustments (COLA) in 42 of the past 45 years (i.e., in the years where inflation occurred), you're probably wondering how it's possible that senior citizens could have been slighted so badly on their Social Security income. After all, COLA is supposed to keep folks on par with the rising price of goods and services.
The answer to this disparity can be found in the Social Security's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W, as the name implies, tracks the spending habits of urban and clerical workers, who aren't retired workers or receiving Social Security benefits. In other words, their spending habits don't accurately reflect the typical expenditures of a senior receiving a Social Security benefit. The result is that important expenditures for seniors, such as housing and medical care, tend to be underweighted. Meanwhile, less important costs, such as apparel and education, receive more weighting.
Ultimately, the COLA retired workers receive doesn't allow them to keep pace with the inflation they're contending with.
Yes, Social Security beneficiaries look to be in line for another "raise" in 2020
But I have some potentially good news for seniors: Another "raise" may be headed your way in 2020.
Social Security recipients began the year with a 1.6% COLA, which is pretty close to the average bump up in payout they've received over the past decade. However, things changed on March 27, when the coronavirus disease 2019 (COVID-19) pandemic prompted Congress to pass, and President Trump to sign, the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. This $2.2 trillion relief bill had numerous aims, including the disbursement of $300 billion in direct stimulus to well over 150 million Americans.
Although dependents aged 17 and over were excluded from receiving an Economic Impact Payment under the CARES Act, a majority of Social Security beneficiaries were able to receive a payout, which was capped at $1,200 per individual or $2,400 for married couples filing jointly.
Some would argue that this one-time stimulus payment to seniors doesn't represent a raise. But considering that a Social Security retirement benefit is a source of fixed income that only changes based on its tethering to the CPI-W, a $1,200 one-time check represents about a 7% bump up in annual income for the average retired worker in 2020.
With lawmakers on Capitol Hill starting to get serious about passing a phase 4 deal (for reference, the CARES Act was phase 3), it's starting to look increasingly likely that seniors will receive a second round of direct stimulus this year.
What can Social Security recipients expect from another round of stimulus?
The real question at this point is what might the next round of stimulus look like?
Democrats in Washington have primarily been focusing on a bill that would be more inclusive. This would include removing the age limitations associated with being a dependent, which would allow a household or parent of a dependent to receive a larger payout. With Democrats pushing hard for this inclusivity, seniors should expect that, if another round of stimulus is passed, they're going to be included in the long list of potential recipients.
Meanwhile, Republicans are primarily focused on trying to keep the federal budget deficit in 2020 from spiraling out of control, and ensuring that there's not a disincentive to go back to work. The big debate on a phase 4 deal is likely to be over enhanced unemployment benefits, which won't be a big concern for Social Security beneficiaries since a vast majority of recipients are retired.
Interestingly, President Trump recently confirmed his desire to see a larger payout to the American public than they were given under the CARES Act. This comes after the Democrat-led House of Representative passed the $3 trillion HEROES Act on May 15. The HEROES Act would, once again, offer a $1,200 one-time payment to individuals and $2,400 to couples, with dependents (limit three) adding $1,200 each to what a parent or household receives, as opposed to $500 each under the CARES Act. The HEROES Act remains dead-on-arrival in the Republican-led Senate.
The point is, Social Security beneficiaries appear to be in-line to receive a second round of direct stimulus sometime this year, which may help to partially ease what's been a precipitous decline in the purchasing power of Social Security income over the past two decades.