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Why Social Security Needs to Change the Way It Calculates Raises

By Maurie Backman - Nov 8, 2020 at 8:18AM

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Seniors on Social Security have continuously lost buying power, and if changes aren't implemented, things could get even worse.

Each year, seniors on Social Security eagerly await news of a cost-of-living adjustment, or COLA, to keep up with their living expenses. But Social Security COLAs have been notably stingy over the past 10 years, and as a result, seniors have lost a whopping 30% of their buying power since 2000. Here, we'll discuss why COLAs have been so low and what can be done about it.

What's up with those numbers?

Between 2002 and 2011, Social Security COLAs averaged 2.43%, which is somewhat in line with the general rate of inflation. Between 2012 and 2021, on the other hand, COLAs averaged just 1.65%.

Chart showing Social Security COLAs over the past two decades

Image source: Author.

It's worth noting that back in the 1980s and 1990s, Social Security COLAs were much higher. In 1980, for example, seniors got a 14.3% COLA. But inflation rates were higher back then, too, and Social Security is supposed to adjust proportionately.

Loose pile of Social Security cards

Image source: Getty Images.

A poor means of calculating COLAs

Social Security COLAs are determined by aggregating third quarter data each year from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the cost of common goods and services goes up, benefits increase as well. When the CPI-W shows no change, or a downward change, there's no COLA. (Thankfully, Social Security benefits can't go down from year to year, so the worst thing that happens is that seniors are simply denied a raise.)

The problem, however, is that the CPI-W is not an accurate measure of the costs seniors face. Fuel costs, for example, are a major driver of the CPI-W, but many seniors don't spend much on gasoline. In the absence of a daily job to go to, transportation spending tends to decline for seniors, yet the extent to which they get a raise from year to year hinges on an expense that applies more so to the general population than to older Americans.

On the other hand, seniors do tend to spend a large chunk of their retirement income on healthcare. In fact, it's estimated that the average 65-year-old couple retiring today will spend an alarming $606,337 on medical costs throughout retirement, and that estimate doesn't even account for long-term care. If COLAs continue to follow the CPI-W, seniors are apt to lose even more buying power in the future.

A change is needed

Switching the way COLAs are determined could help Social Security beneficiaries avoid a world of financial stress. One solution could be to measure COLAs using a different index -- the Consumer Price Index for the Elderly (CPI-E), which would more accurately reflect the costs seniors face. But unless lawmakers agree to that change, or a comparable one, seniors on Social Security are apt to continue struggling year after year, especially as Medicare premium hikes eat away at the meager COLAs they're privy to.

Relying on the CPI-W for Social Security COLAs may have worked in the past. But the chart above speaks for itself. If COLAs continue to decline, seniors who derive the bulk of their income from Social Security will inch closer and closer to the poverty line, and it's up to lawmakers to prevent that from happening.

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