Most retired seniors collect Social Security benefits, and for many, they're a crucial income source that helps cover bills and essential expenses.
Unfortunately, a troubling new report shows retirees are missing out on thousands of dollars in Social Security benefits that they should have collected over the course of their lifetimes. Seniors aren't collecting this money because of an issue with the way that cost-of-living adjustments are calculated.
Here's what you need to know about the thousands of dollars in benefits that seniors have lost out on.
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Why retirees miss out on thousands in Social Security benefits
The report that revealed the issue with Social Security was prepared by The Senior Citizens League, a major senior advocacy group.
According to the report, the Social Security COLA is not doing its job. It's supposed to enable retirees to maintain the buying power of their benefits, even as costs go up. Benefits must increase along with costs; otherwise, they would buy less and less. But the COLA isn't helping as much as it should, the report says, and despite COLAs being built into the program, they aren't really keeping retirees from feeling inflation's full effects.
The problem comes from the consumer price index that is used to calculate the amount of the COLA. Since it's intended to fight inflation, the formula looks at a price index to determine how much more goods and services cost from one year to the next. The index chosen for this is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Sadly, the spending habits of urban wage earners diverge in important ways from the spending habits of seniors, so the Social Security raise doesn't accurately measure the increase in expenses that retirees experience. The CPI-W underestimates the amount seniors spend in categories where inflation tends to be very high, including healthcare, so it doesn't give an accurate picture of how much benefits should increase for retirees to maintain their buying power.
The Senior Citizens League has done an analysis to determine how much more money retirees should have if the COLAs were calculated using the proper index. And the answer isn't good for retirees: The report says the average senior who retired in 1999 has lost close to $5,000 in benefits because the wrong price index is used to calculate Social Security COLAs. The Consumer Price Index for the Elderly (CPI-E) shows what retirees should be collecting.
A simple change could fix this problem
This news of $5,000 in missing benefits is especially disappointing for retirees because there's a simple fix. The CPI-E already exists, and it shows just how much inflation is actually impacting typical seniors based on their spending patterns. Social Security could use the CPI-E data to calculate the annual benefits increase provided to retirees instead of sticking with the CPI-W, which is shorting them by thousands of dollars over time.
The CPI-E is experimental because a smaller sample size is used to calculate it than with the CPI-W, but making changes to the methodology would be a relatively minor project for the government -- as well as a justified change to protect the finances of vulnerable retirees. With the value of benefits eroding, right now, seniors are forced to decide between making downgrades to their lifestyles or taking more money out of retirement plans to supplement Social Security benefits. That puts them in a tight spot.
Unfortunately, while there is a solution, the government probably won't make a change to offer more generous benefits anytime soon. In fact, the reverse is more likely, and changes could give retirees even less to live on since the program is facing financial challenges.
Retirees need to be aware of the money they're missing out on and the eroding value of their benefits, so they can adjust their budgets to avoid draining their 401(k)s too quickly by trying to keep their spending the same when inflation surges.
