Sen. Bernie Sanders of Vermont once referred to Social Security as "the most successful government program in our nation's history," and he's 100% correct.
For more than 80 years, Social Security has provided a financial foundation for our nation's elderly workers who could no longer provide for themselves. Today, it's responsible for lifting more than 22 million beneficiaries a month out of poverty, including over 15 million retired workers. Without Social Security's guaranteed monthly income, it's been estimated that the elderly poverty rate would be more than four times higher than what it is today.
Social Security has its fair share of problems
But let's make one thing clear: Social Security is far from perfect.
This is a program that's currently staring down an estimated $16.8 trillion in unfunded obligations over the next 75 years, and it's expected to completely exhaust its $2.9 trillion in asset reserves in 15 years (or sooner). Without direct involvement from lawmakers in the form of additional revenue or expenditure cuts, retired workers could face an across-the-board benefit reduction of 24% by 2035.
It's also a dynamic program with a number of ongoing demographic factors that aren't helping it succeed. Birth rates are chiming in at an all-time low, while net legal immigration has been practically halved on an annual basis over the past two decades. Both a steady number of births and an influx of young legal immigrants are needed to support Social Security's worker-to-beneficiary ratio.
Yet the biggest issue of all just might be that Social Security benefits aren't keeping up with inflation, as initially intended.
The purchasing power of Social Security income has plunged since 2000
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as Social Security's inflationary tether. It measures the price change for a pre-set basket of goods and services, which is then used to determine how much of an inflationary "raise" Social Security's tens of millions of beneficiaries will receive in the following year.
Though you can read a more thorough explanation of how Social Security's cost-of-living adjustment (COLA) is calculated, the important thing to note is that CPI-W readings from the third quarter (July through September) are ultimately responsible for determining Social Security's COLA.
You'd think that, with the CPI-W in place, Social Security recipients would receive adequate pay bumps every year to keep up with inflation. But this is rarely the case. According to an analysis from The Senior Citizens League (TSCL), a nonpartisan group focused on advancing important issues affecting seniors, the purchasing power of Social Security dollars has declined by 30% since 2000.
To make this easier to understand, the average Social Security beneficiary was bringing home $816 a month in 2000. Over the past 20 years, the aggregate COLA has totaled 53%, which would have pushed the average beneficiaries' monthly payout to $1,246.20 a month. However, the price for a basket of 40 commonly purchased goods and services that TSCL measured has risen by 99.3% over the past 20 years. This means average Social Security beneficiaries need $1,626.20 a month simply to be on par with where they were in 2000. This $380 a month difference works out to a greater than $4,500 loss in purchasing power on an annual basis for the typical beneficiary.
Why aren't Social Security benefits keeping pace with inflation?
You're probably (rightly) asking how it's possible that the CPI-W could be doing such a poor job of measuring inflation. The answer is that the CPI-W is tracking the expenditures of people who largely don't receive a Social Security benefit -- i.e., urban and clerical workers.
Suffice it to say that urban and clerical workers spend their money very differently than senior citizens. As a result, we often see expenditures important to seniors, such as medical care and shelter, underrepresented in the CPI-W weighting. By comparison, costs that are more important to working-age Americans, like education and apparel, receive a higher weighting in the CPI-W, but have virtually no bearing for seniors. The end result is a more than $4,500 annual loss in purchasing power for the average beneficiary in two decades.
One of the few things Democrats and Republicans agree on when it comes to Social Security is that the CPI-W isn't doing a very good job of accurately measuring inflation for seniors. Both parties would like to see it replaced. But since each party is approaching its "fix" from opposite ends of the spectrum, nothing has been done.
Democrats prefer switching to the experimental Consumer Price Index for the Elderly (CPI-E), which, as the name implies, would track the spending habits of households with seniors age 62 and up to obtain more accurate inflation readings. Meanwhile, Republican favor the Chained CPI, which accounts for substitution bias, or the idea of trading down to a cheaper good or service when an item or service becomes too pricey.
Without some form of congressional compromise, the CPI-W will remain the program's COLA determinant, and seniors can expect to see the purchasing power of their Social Security income eroded over time.