Cost-of-living adjustments (COLAs) are a crucial part of the Social Security benefits program. In most years, they provide retirees with extra income in their checks to help ensure they can maintain their buying power even as inflation causes the cost of goods and services to rise.
Since COLAs are so important, a new report that shows they often fall short is a major problem.
The Senior Citizens League (TSCL), a senior advocacy group, has published data highlighting how often retirees are being let down by COLAs that are too low. And the news is definitely not good since it has far-reaching implications for the financial security of seniors across the U.S.
Image source: Getty Images.
Social Security COLAs fall short more often than not
According to TSCL, with 69% of the last 25 Social Security COLAs, the benefit increase was smaller than it should have been to actually provide meaningful relief from inflation for retirees.
That troubling statistic is based on a comparison of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) versus the Consumer Price Index for the Elderly (CPI-E). Comparing changes to the two indexes is key to understanding why retirees are getting shortchanged on their Social Security benefit bumps.
Under the current system, the CPI-W is used to measure the inflation retirees are experiencing. When CPI-W data for the third quarter shows price increases year over year, retirees get a COLA equal to the average increase.
The CPI-W, however, is made up of a basket of goods and services designed to match the spending habits of urban wage earners and clerical workers. This doesn't weigh things like healthcare and housing as high as it should. That's a problem, because inflation in these categories tends to be higher.
The CPI-E is a different index, designed to track the price changes in the basket of goods and services retirees actually use. And TSCL found that in the case of 69% of the last 25 COLAs, basing the adjustment on the CPI-E would have resulted in seniors getting a bigger Social Security benefits increase.
Retirees are losing ground, and it has consequences
The fact that seniors received too small of a raise 69% of the time over the last 25 years has had consequences for their finances. TSCL found that retirees have lost out on thousands of dollars in benefits they would have collected if the COLA formula worked properly.
Without this added money to help them maintain buying power, many seniors have had to downgrade their spending or withdraw more money from their retirement plans. Unfortunately, retirees often have too little in these plans to begin with. TSCL found that 21.8 million seniors, or 39% of all Americans 65 and up, get 100% of their income from Social Security, while the median senior has less than $2,000 per month to cover costs.
If retirees have 401(k) and IRA balances that are too small, or have no money in these accounts at all, they're already going to have a hard time because Social Security isn't meant to be a sole source of support. It replaces only around 40% of pre-retirement income, which is far less than what most people must replace.
Since the value of Social Security benefits erodes more and more over time due to this COLA shortcoming, and many seniors see their savings dwindle and their healthcare costs climb higher later in life, this is a recipe for disaster.
The Senior Citizens League said there have been attempts before to change the COLA formula, but all have been unsuccessful because of Washington gridlock. And it's likely to continue for the foreseeable future, which means retirees are stuck dealing with this difficult situation with few good options.
Those who aren't yet retired should operate on the assumption their Social Security benefit increases will fall short more often than not. This means saving up a generous nest egg is crucial -- as is setting a safe withdrawal rate during the retirement planning process -- to better understand how to effectively manage money once you're no longer a worker.
