Social Security provides monthly income to millions of Americans, and most retirees depend on those benefits to make ends meet. But some policy experts believe Social Security payouts have failed to keep up with rising prices across the economy in recent years. In fact, the average benefit has fallen short of inflation by $1,054 since the beginning of 2020, according to The Senior Citizens League (TSCL).
Here's what retired workers should know.
Image source: Getty Images.
How Social Security's cost-of-living adjustments (COLAs) are determined
Social Security benefits get an annual cost-of-living adjustment (COLA) to keep the payouts aligned with inflation. Those COLAs are determined based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Here is how COLAs are calculated: The CPI-W from the third quarter of the current year is divided by the CPI-W from the third quarter of the prior year, and the percent increase (if any) becomes the COLA in the following year. For instance, the CPI-W increased 8.7% in the third quarter of 2022, so Social Security benefits received an 8.7% COLA in 2023, the largest increase since 1982.
Some experts see a problem. The CPI-W measures inflation based on the expenditures of hourly wage earners and office workers, but those individuals tend to spend money differently than retirees. Specifically, younger Americans still in the workforce tend to spend more on education, apparel, and transportation, while older Americans who have retired tend to spend more on medical care and housing. Put another way, the CPI-W underemphasizes the spending categories most relevant to retirees, and it overemphasizes the less relevant spending categories.
Some policy experts and politicians want to make a change
Some policy experts favor an alternative measure of inflation known as the Consumer Price Index for the Elderly (CPI-E), which is based on spending patterns of individuals aged 62 years and older. The CPI-E uses the same eight spending categories as the CPI-W, but their weighting varies based on their relative important to the underlying population.
The chart below details how expenditure weights differ between the CPI-E and the CPI-W.
|
Spending Category |
CPI-E |
CPI-W |
|---|---|---|
|
Housing |
49.4% |
42.7% |
|
Transportation |
12.9% |
18.2% |
|
Food and beverage |
12.8% |
15.8% |
|
Medical care |
11.3% |
7.1% |
|
Recreation |
5.2% |
4.7% |
|
Education and communication |
4.1% |
5.8% |
|
Other goods and services |
2.6% |
2.8% |
|
Apparel |
1.7% |
2.9% |
|
Total |
100% |
100% |
Source: The Bureau of Labor Statistics. December 2022.
As indicated above, the CPI-E places more emphasis on spending categories like medical care and housing, and it places less emphasis on spending categories like transportation, education, and apparel. In other words, the CPI-E expenditure weights are better aligned with how older Americans spend their money.
Not surprisingly, many lawmakers have proposed legislation that would use the CPI-E rather than the CPI-W to calculate Social Security COLAs. In fact, Senator Bernie Sanders (I-VT) and nine Democratic cosponsors reintroduced the Social Security Expansion Act in Congress last month. That bill proposes nine major changes to the Social Security program, most of which focus on boosting revenue to avoid trust fund depletion. But the Social Security Expansion Act also proposes replacing the CPI-W with the CPI-E in December 2025.
How much the CPI-E would boost Social Security benefits
Social Security's annual COLAs would be about 0.2 percentage points higher if they were based on the CPI-E instead of the CPI-W, according to the Office of the Chief Actuary. That may sound insignificant, but compounding can turn small numbers into big numbers over long periods of time.
The chart below compares changes in the third-quarter CPI-W and the third-quarter CPI-E over the past decade. In other words, it compares the actual COLAs applied to Social Security benefits (in the following year) to the theoretical COLAs based on the CPI-E.
|
Year |
CPI-W (Q3 Change) |
CPI-E (Q3 Change) |
|---|---|---|
|
2013 |
1.5% |
1.6% |
|
2014 |
1.7% |
2% |
|
2015 |
0% |
0.6% |
|
2016 |
0.3% |
1.5% |
|
2017 |
2% |
2.1% |
|
2018 |
2.8% |
2.6% |
|
2019 |
1.6% |
1.9% |
|
2020 |
1.3% |
1.4% |
|
2021 |
5.9% |
4.8% |
|
2022 |
8.7% |
8% |
|
2013-2022 |
28.6% |
29.7% |
Data sources: Social Security Administration; Bureau of Labor Statistics. Chart by Author.
As indicated above, the growth in Social Security benefits would be about 1.1 percentage points higher today if the CPI-E had been used to calculate COLAs over the past decade.
What does that mean for retirees? The average monthly benefit paid to retired worker was $1,264.03 in January 2013. That same worker now receives $1,625.54 per month, but they would be receiving $1,639.44 per month if the CPI-E had been the preferred measure of inflation over the past decade. The difference is about $14 per month, or $168 for the full year.
Social Security benefits may regain some lost buying power this year
Given the information above, readers may wonder why TSCL says COLAs have fallen short of inflation by $1,054 over the past three years. The inflation rate began climbing quickly in early 2021, reaching a four-decade high later that year, and it kept climbing through June 2022. For that reason, the 2021 COLA (which was calculated in Q3 2020) severely underestimated the inflation that ensued throughout the following year. The same problem happened again with the 2022 COLA.
Fortunately, the opposite scenario appears to be playing out today. Beneficiaries received an 8.7% COLA in 2023, but the CPI-W was up only 6.3% year over year in January 2023. Assuming inflation continues to cool throughout the year, benefits should regain some lost buying power.
