Social Security benefits are a crucial income source for millions of Americans. That's one reason why the program was designed to include cost-of-living adjustments (COLAs).
COLAs happen in most years and result in retirees getting a benefits increase. These COLAs are necessary because the price of goods and services goes up year over year. Without COLAs, retirees would see the value of their benefits erode over time, until eventually they could buy very little.
While COLAs are supposed to ensure that benefits retain their value, this isn't working as well as it should. The result is that retirees are seeing their purchasing power decline dramatically over time and are effectively out thousands of dollars that they should be getting each year to maintain their standard of living.
Here's why your benefits are falling short, along with details on how much extra money you'd need to get back on track.
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Social Security retirees have seen the value of their benefits fall sharply
According to the Senior Citizens League, a senior advocacy group, Social Security benefits have lost a shocking 20% of their buying power since 2010. This means that benefits are worth around $0.80 on the dollar.
In order for retirees to have the same buying power as seniors did in 2010, the Senior Citizens League calculated that the average retiree would need $4,442 per year in extra benefits. Unfortunately, the Senior Citizens League also believes it is unlikely that the COLAs retirees get in the future will make up for this shortfall, unless something major changes with the program.
Being short by $4,442 is obviously a big hit for seniors to take, especially when many people have too little money saved for retirement and rely on Social Security more than they should already.
Why are Social Security benefits not keeping pace with inflation?
It may seem surprising to hear that Social Security benefits are not keeping pace with inflation, given the fact that COLAs are built right into the program to ensure that retirees don't see this kind of loss in buying power.
The problem, unfortunately, comes from the way that COLAs are calculated. Cost-of-living adjustments are calculated based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W takes into account changes in the prices of a basket of goods and services used by urban wage earners and clerical workers.
This group, however, is not the same as senior citizens. Urban wage earners and clerical workers don't spend the same way that seniors do. Retirees tend to devote more of their money to things that go up in value faster than inflation, including healthcare and housing. So, since the basket of goods and services used to track price changes underestimates the percentage of spending in these categories, the real inflation retirees are experiencing is underestimated as well.
In the past, lawmakers have suggested making a change to a different consumer price index that tracks the spending of the elderly. However, Social Security is already facing financial trouble, and switching to a system that results in larger benefits increases would only exacerbate that, so it's unlikely to happen. Instead, retirees are going to have to continue coping with benefits that lose buying power, and adjust their budgets accordingly, given they are being shorted by over $4,000 per year.
