Our nation's most important social program is Social Security. According to a report from the Center on Budget and Policy Priorities in February 2020, Social Security is responsible for pulling 21.7 million Americans out of poverty each year.
A vast majority of current and future retirees rely on Social Security to make ends meet. When Gallup asked respondents about their reliance on Social Security payouts, 89% of current retirees described it as a "major" or "minor" income source, whereas an all-time high 85% of nonretirees expected to lean on the program in some capacity during retirement.
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Social Security's cost-of-living adjustment is the center of attention.
The cost-of-living adjustment, or COLA, is the most anticipated announcement each year because of the importance placed on Social Security payouts.
In simple terms, COLA is the annual increase passed along to the programs' more than 65 million beneficiaries that is designed to keep them on par with inflation. Social Security benefits should increase in unison so 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476 888-282-0476
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the inflationary tether for the Social Security program. The upcoming years' COLA is determined by readings from the third quarter. If the average third-quarter reading is higher than the average third-quarter reading from the previous year, beneficiaries will receive a raise in the upcoming year.
I put "raise" in quotation marks to show that COLA is designed to keep beneficiaries on pace with inflation, not to help them get ahead. COLA isn't a raise in the true sense of the word.
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Retired workers are losing out despite a huge COLA.
Social Security beneficiaries will get their biggest payouts hike in nearly four decades in the new year.
The many COLAs that preceded it since the turn of the century aren't keeping pace with inflation.
In October, The Senior Citizens League compared the impact of Social Security's COLAs to real inflation for retired workers. The increase in COLA since the turn of the century was over 50%. The average Social Security benefit has increased from $816 a month to $1,262 a month.
The typical expenses seniors have faced over the last 21 years have increased by 104.8%. In order for Social Security benefits to have kept up with inflation, retired workers should have been getting about $400 more per month. The average Social Security beneficiary will have a shortfall of about $4,300 over the course of a year.
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Social Security beneficiaries are getting shortchanged.
How does the purchasing power of Social Security decline for retired workers? The answer is simple, the inflation gauge does a poor job of tracking inflation.
The full name of the Consumer Price Index for Urban Wage Earners and Clerical Workers is a huge clue as to why this inflationary tether is failing seniors. Wage earners and clerical workers are usually not receiving a Social Security benefit. The program is tied to the spending habits of working-age Americans.
The issue is that working-age people spend their money differently than retirees. For retirees, housing costs and medical care account for a larger percentage of total household expenditures than for working-age people. Working-age Americans spend more on things like education, entertainment, apparel, and transportation than seniors do. The lesser-importance categories are assigned a higher weight by the CPI-W. The loss of purchasing power for the average Social Security beneficiary over 21 years is roughly $4,900.
Even though lawmakers on Capitol Hill agree that the CPI-W is doing a poor job of tracking inflation for Social Security's 65 million-plus beneficiaries, no changes are expected anytime soon because Democrats and Republicans can't agree on how to fix it. Neither party is willing to compromise or find common ground because they believe they have a solution that will work best.
Social Security beneficiaries should expect to lose purchasing power over time even with the highest COLA since 1983.
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