When the coronavirus pandemic hit earlier this year, many analysts worried that decreasing gas prices meant that seniors would get no Social Security raise going into 2021. In the end, seniors are getting an increase after all -- a 1.3% cost-of-living adjustment, or COLA.
If that seems stingy at first glance, well, it is. In fact, for the typical senior, that boost will amount to less than $20 extra per month, and that's without factoring in Medicare Part B premium increases. Unfortunately, this isn't a situation unique to 2021. Seniors on Social Security have been losing buying power for years because of one big issue.
Why Social Security benefits won't be worth much in 2021
Though monthly Social Security checks will rise modestly in 2021, there's a good chance that healthcare costs will rise even more.
This dynamic has already been happening for years. Healthcare costs have increased by an average of 2.928% annually over the past 10 years (this percentage includes projections for the remainder of 2020). If, as seems likely, this holds true for 2021, it means the coming year's COLA will amount to less than half the increase seniors will face on their healthcare bills alone. In fact, Social Security beneficiaries have lost a whopping 30% of their buying power since the year 2000, with much of that directly tied to healthcare costs.
What's worse is that senior healthcare costs aren't factored into COLA calculations. COLAs are instead determined based on annual third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the costs of common goods and services rise, benefits get a boost. Unfortunately, the CPI-W doesn't measure senior-specific expenses at all.
Fuel costs, for example, significantly impact the CPI-W -- but seniors generally don't spend much money on fuel. Many don't work and therefore don't drive daily. Even among seniors who spend more time in their cars, fuel costs tend to pale in comparison to what they're forced to spend year after year just to keep up with their health.
A big change is needed
The fact that seniors on Social Security will lose buying power in 2021 isn't just a function of the meager COLA. Rather, it's a symptom of a poor system for calculating COLAs in the first place. Senior advocates have long recommended switching over to the Consumer Price Index for the Elderly (CPI-E) to determine COLAs -- a more targeted index that can properly account for healthcare inflation. For that to happen, lawmakers need to agree to change the law. Many have expressed reluctance to do so.
Unfortunately, if this situation doesn't change, seniors are likely to lose buying power at increasing rates. Given the number of retirees who get the bulk of their income from Social Security, that's dangerous. While future beneficiaries have a chance to boost their savings and set aside funds for healthcare expenses in retirement, today's seniors are pretty much stuck getting squeezed unless lawmakers intervene.