Social Security is, unquestionably, our nation's most valuable social resource. For more than 80 years, it's provided a financial foundation for retired workers. Today it's responsible for pulling more than 15 million retirees out of poverty every year. Without this vital program, the U.S. elderly poverty rate would be more than four times higher than it is today, according to an analysis from the Center on Budget and Policy Priorities.
Yet it's also a program facing its biggest challenge in history.
Problems are compounding for Social Security
Every year, the Social Security Board of Trustees releases a report detailing the short-term (10-year) and long-term (75-year) outlook for the program. Since 1985, the Trustees have cautioned that long-term revenue generation would be insufficient to cover expected outlays. This unfunded-obligation figure has ballooned to $16.8 trillion as of 2020.
How does the top social program in the U.S. go from being viewed as infallible to a nearly $17 trillion projected cash shortfall? Look no further than a handful of ongoing demographic shifts. Aside from the retirement of baby boomers, we're talking about growing income inequality, reduced net legal immigration, and an all-time low for birth rates as being net negatives for Social Security.
If the current course continues, the 2020 Trustees report predicts that the program's $2.9 trillion in asset reserves (i.e., net cash surpluses built up since inception) will be exhausted by 2035. Once these asset reserves are history, sweeping benefit cuts of up to 24% may await retired workers.
Suffice it to say, there's a very real fear among current and future retirees that Social Security benefit cuts are coming.
But what if I told you that these benefit cuts are already here, and you just weren't paying close enough attention to have noticed?
The CPI-W has been reducing seniors' real income for decades
As one example, take a closer look at how Social Security's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), has influenced the purchasing power of seniors' Social Security dollars over the past 20 years.
Since 1975, the CPI-W has measured the price changes for a predetermined basket of goods and services. The Social Security Administration is then able to compare the average CPI-W reading from the third quarter (July through September) of the current year to the average CPI-W reading from the third quarter of the previous year. If the average has risen from one year to the next, it signifies inflation. And when there's inflation, it means Social Security beneficiaries are receiving a cost-of-living adjustment (COLA) in the upcoming year.
This may sound like a perfect system to measure the inflation that Social Security's 64 million beneficiaries are facing, but it's highly flawed. That's because, as the CPI-W's official name implies, it tracks the spending habits of urban and clerical workers, neither of which are typically seniors or Social Security beneficiaries. Essentially, this means Social Security's COLA determinant is tethered to a group of people who don't represent a majority of beneficiaries.
In plainer English, the CPI-W isn't providing accurate inflation readings for the costs seniors are facing. Important expenditures (relative to retired workers' budgets) like medical care and housing are being underweighted. Meanwhile, less-important costs to seniors, such as education, apparel, and transportation, are given added weight.
The result, according to The Senior Citizens League, is a 30% loss of purchasing power for Social Security income since 2000.
But wait, there's more
But an inadequate COLA isn't the only way that Social Security benefits are being cut.
Another culprit over the past decade has been persistently low levels of inflation. On one hand, low levels of inflation would seem to favor consumers, and to some extent this is true. But there are two ways that a low-inflation environment can hurt Social Security payouts.
First, low levels of inflation take away the incentive for companies to give their employees substantive raises. This leads to stagnant or slow-growing wages. Since the Social Security Administration takes workers' 35 highest-earning, inflation-adjusted years into account when calculating their monthly benefit at full retirement age, an extended period of stagnant wage growth could certainly hurt initial benefits or lower lifetime benefits received.
Second, a low-inflation environment will result in a smaller COLA being passed along to current beneficiaries. Over the past decade, the average Social Security COLA is a meager 1.4%, which includes three years where there was no COLA at all due to deflation (2010, 2011, and 2016).
But just because broader levels of inflation are down doesn't mean that the costs seniors contend with are tame. In most years over the past decade, medical-care inflation has handily outpaced the COLA given to Social Security beneficiaries. As a result, the purchasing power of benefits has been further eroded.
Social Security benefit cuts? Hate to break it to you, but they're already here.