Washington Says Social Security's Cost-of-Living Adjustments (COLAs) Are Too Small. Here's What Retirees Should Know

It's no secret that Social Security is fraught with problems. One particularly consequential issue is the annual cost-of-living adjustment (COLA). Specifically, while Social Security recipients get an annual COLA meant to protect the buying power of benefits from inflation, many politicians and policy experts believe those COLAs tend to be too small.

Indeed, The Senior Citizens League estimates that Social Security benefits have lost about 36% of their buying power since 2000, and a recent survey suggests that 80% of retired workers think Congress should do more to protect benefit payments from inflation. But earlier this year, a group of Washington lawmakers introduced a bill that could resolve the problem by changing the way COLAs are calculated.

Here's what retired workers should know.

Image source: Getty Images.

How Social Security's cost-of-living adjustments (COLAs) are calculated

Under current law, Social Security's COLAs are calculated based on the year-over-year change in the third quarter reading for the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This metric tracks spending patterns among working-age individuals, but there is a glaring problem with that methodology.

Specifically, by tracking spending habits among workers, the CPI-W is naturally skewed toward younger people. But Social Security recipients tend to be older retirees, and they spend money differently than working-age individuals. The prevailing consensus is that the CPI-W underestimates inflation (from the perspective of seniors) by about 0.2 percentage points each year.

That's why many Washington lawmakers think COLAs should be tied to the Consumer Price Index for the Elderly (CPI-E), a measure of inflation that tracks spending patterns among people aged 62 and older. The CPI-E also places more emphasis on the purchase categories most relevant to seniors, like housing and medical care.

To address that issue, Senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA), along with Representatives Jan Schakowsky (D-IL) and Val Hoyle (D-OR), introduced the Social Security Expansion Act earlier this year. The legislation proposes several revisions to the Social Security program, including a modified COLA calculation that would replace the CPI-W with the CPI-E starting in 2026. Nearly three dozen Democratic congressmen and congresswomen have signed onto the bill as cosponsors.

To be frank, the Social Security Expansion Act is unlikely to win Congressional approval in its current form, at least not with Republicans controlling the House of Representatives. But the bill could eventually pass in a different form, or a different piece of legislation could replace the CPI-W with the CPI-E in the future. Either way, it's worth exploring how Social Security benefits might change if that happens.

Comparing the CPI-W and the CPI-E over the last 10 years

Social Security benefits will get a 3.2% COLA in 2024, a much smaller increase than the 8.7% COLA beneficiaries received in 2023 but still above the 10-year average of 2.8%. However, Social Security benefits would increase 4.0% in 2024 if the COLA had been calculated using the CPI-E instead of the CPI-W.

That said, one year hardly qualifies as a pattern, so the chart below goes further back. It compares the actual CPI-W COLA to the hypothetical CPI-E COLA over the last decade. It also shows the cumulative COLA in each scenario.

Data source: Social Security Administration. Chart by Author.

As shown above, the cumulative CPI-E COLA was 32.7% over the last decade, slightly higher than the cumulative CPI-W COLA of 30.8%.

So what? In Dec. 2014, the average monthly Social Security benefit paid to retired workers was $1,328.58 (or $15,942.96 per year). The figures below detail how that total has changed through 2024 based on actual CPI-W COLAs, and how it would have changed based on CPI-E COLAs.

• CPI-W COLAs: $1,737.00 per month ($20,844.00 per year) in 2024
• CPI-E COLAs: $1,762.40 per month ($21,148.80 per year) in 2024

Here's the bottom line: The average retired worker in 2014 would receive an additional $25.40 per month in 2024 (or $304.80 for the full year) if the CPI-E had been used to calculate COLAs over the last decade. The difference is not enormous, but a few hundred dollars could be meaningful in certain situations, and I doubt many would turn down the extra income.