For better or worse, Social Security is our nation's most important social program. Of the nearly 65 million people receiving benefits each month, more than 70% are senior citizens. Most of these retirees rely on Social Security to account for at least half of their monthly income.

But according to a recent analysis, Social Security's retired workers may not be getting their fair share from the program.

A visibly concerned senior in deep thought, with their chin resting on their balled fist.

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Seniors, you're being cheated out of almost $3,000 a year

Three weeks ago, nonpartisan senior advocacy group The Senior Citizens League (TSCL) examined a growing disparity that's emerged with Social Security's annual cost-of-living adjustment (COLA). Think of COLA as the "raise" that beneficiaries receive to account for inflation (the rising price of goods and services).

In the 20 years between 1990 and 2009, Social Security's COLA averaged 3% -- that is, monthly benefits increased by an average of 3% per year over this two-decade period. But between 2010 to 2020, the average Social Security COLA has only averaged 1.4%. This period includes three years when no COLA was passed along, the smallest positive increase on record (0.3%), and the recently announced COLA of 1.3% for the upcoming year, which ties for the second-smallest positive payout hike on record.

A difference of roughly 1.6 percentage points might not sound like a lot, but it's made a huge difference in seniors' pocketbooks. Per TSCL Social Security policy analyst Mary Johnson, an average monthly payout of $1,075 in 2009 would have increased to only $1,249 by 2020 at an average annual COLA of 1.4%. But if COLAs averaged 3%, as they had between 1990 and 2009, the average monthly benefit would be $247 a month higher (nearly 20% higher) than it is today. Over the course of a year, that's a nearly $3,000 difference. 

Two Social Security cards and two one hundred dollar bills lying atop a payout sheet.

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There's a fix for Social Security's COLA shortcomings

How is it that seniors are being cheated out of close to $3,000 a year in Social Security benefits? The answer boils down to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which frankly isn't a good inflationary measure for the Social Security program.

As the name implies, the CPI-W tracks the spending habits of urban and clerical workers -- the majority of whom are working-age Americans, not retired workers receiving Social Security benefits. As a result, important expenditures for seniors (e.g., shelter and medical care services) aren't given enough weighting in the COLA calculation, while less important expenditures (apparel and education) are given added weighting. This disparity has resulted in a precipitous loss of purchasing power for seniors receiving Social Security income.

There's a proposal that could address this Social Security shortcoming. Some lawmakers on Capitol Hill, along with TSCL, have recommended ditching the CPI-W in favor of the Consumer Price Index for the Elderly (CPI-E). As its name suggests, the CPI-E tracks the spending habits of households with persons aged 62 and up. An index focused on what seniors are buying should result in a more accurate COLA, likely leading to higher collective COLAs over the long run.

A senior counting a fanned pile of cash in their hands.

Image source: Getty Images.

Three problems with the CPI-E

Multiple analyses have shown that using the CPI-E in place of the CPI-W would be positive for retired workers' wallets. But that doesn't mean the CPI-E is a cure-all, or even a viable solution. Here are three of the biggest issues with this proposed CPI-W replacement.

First, the Bureau of Labor Statistics considers the CPI-E to be an experimental inflationary index. The CPI-E can still be used to track senior citizens' spending habits for Social Security, but its calculation methodology will likely need to be refined. That's a potentially costly and time-consuming process, meaning the CPI-E couldn't be immediately plugged in as a CPI-W replacement.

Second, the CPI-E isn't going to eliminate seniors' loss of purchasing power. Although the CPI-E would do a much better job of accounting for seniors' expenditures, it would still fail to account for certain Medicare expenses. The loss of purchasing power would just be smaller.

The third and final issue is that Republicans in Congress don't support the CPI-E. The GOP believes that the Chained Consumer Price Index, which accounts for substitution bias, is a much more accurate measure of inflation for Social Security than the CPI-E. Without some sort of Republican support, no measure would garner enough votes in the Senate to pass.

Social Security has a COLA problem that's not going away anytime soon.