A lot has changed over the past 20 years. In 2005, the iPhone didn't exist, YouTube was just starting, and people listened to music on CDs instead of an app on their smartphones.
During that time, Social Security retirement benefits have also experienced a change. In 2005, the average monthly Social Security benefit was $1,002, or just over $12,000 annually. To start this year, the average monthly benefit for a retired worker was $1,975.
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Why have monthly benefits increased so much in the past 20 years?
It's not hard to tell just how much prices for many items have increased over the past two decades. Rent has skyrocketed, groceries cost significantly more, and healthcare is becoming one of the largest expenses people (especially retirees) face.
Now, imagine if the average monthly Social Security benefit were still around $1,000. It would be tough to think someone could cover basic expenses, let alone live comfortably in retirement.
That's why Social Security has an annual cost-of-living adjustment (COLA) that's intended to help retirees deal with inflation. The COLA doesn't always keep up perfectly with rising prices, but it's something nonetheless.
How does Social Security decide how much to increase benefits?
Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine how much to increase monthly benefits.
It compares CPI-W data from the current year's third quarter to the previous year's data and adjusts monthly benefits accordingly. If the CPI-W increased by 3%, benefits increase by 3%; if the CPI-W increased by 5%, benefits increase by 5%; and so forth.
Some have argued that the CPI-W isn't a perfect benchmark for measuring retiree spending and therefore that Social Security benefits have lost some of their purchasing power in relation to what older Americans typically need to buy. However, there has been no indication that any alternative benchmark will ever replace the CPI-W.
