Millions of seniors today collect Social Security and rely heavily on those monthly benefits to cover the bulk of their living costs. There's just one problem -- seniors have been consistently losing buying power through the years, and those without additional income could see their struggles increase as Social Security raises continue to lag behind inflation.
Social Security falls short
Each year, Social Security beneficiaries are eligible for a cost-of-living adjustment, or COLA, that has the potential to raise their benefits. The problem? COLAs have been notably stingy in recent years, and seniors are losing buying power because of it.
In 2021, seniors on Social Security got a 1.3% COLA. For the average person, that meant an additional $20 per month. But many common living costs have risen drastically over the past year, reports the nonpartisan Senior Citizens League, to the point where that $20 doesn't go very far at all.
Between March of 2020 and March of 2021, the cost of gasoline increased 22.2% and home heating oil rose 20.2%. The cost of many common household items climbed, as well. Beef roasts increased 11.2%, citrus fruits increased 9.8%, and toilet paper and paper towels increased 7.9%. And while some healthcare costs, like prescription drugs, thankfully held steady, physician services increased 5.3%.
The problem, of course, is that many seniors are limited to a fixed income because their Social Security benefits are their sole cash source month after month. When the general cost of living outpaces COLAs, it leaves seniors struggling to keep up.
A better way to calculate COLAs
A big reason COLAs have fallen short in recent years boils down to the way they're calculated. COLAs are determined annually by taking third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the cost of goods and services rises, benefits increase, as well. When the CPI-W shows no change or a downward change, there's no COLA (though benefits are never reduced, even if the CPI-W moves downward).
The problem, though, is that the CPI-W doesn't necessarily measure the expenses that eat into seniors' income the most, like healthcare. One commonly thrown-around solution by senior advocates is to base COLAs on a different index -- the Consumer Price Index for the Elderly (CPI-E), which would measure senior-specific expenses. But since the CPI-W has been used for years, instituting that change could be a hard sell.
It's too soon to know what the next Social Security COLA will look like, but based on recent numbers, seniors shouldn't expect much in the way of a raise. And even if 2022's COLA proves to be more generous than recent ones, it may still not do enough to help seniors stay afloat in the absence of other income.
Workers are often advised to save aggressively for retirement to be less reliant on Social Security. That's good advice, given the way COLAs have lost buying power in recent years, and given the fact that as of now, there are no plans in the works to change the way they're calculated.