Workers are often warned that retiring on Social Security alone will put them in a very precarious financial situation. And there are several reasons for this.
First, Social Security isn't designed to replace workers' paychecks in full. If anything, those benefits will replace about 40% of the typical pre-retirement paycheck for an average wage earner. For an above-average earner, that percentage will shrink.
Second, Social Security has historically done a poor job of keeping pace with inflation. In fact, it's estimated that since the year 2000, seniors on Social Security have lost a good 30% of their buying power. And it's all because of inadequate cost-of-living adjustments, or COLAs.
COLAs were implemented decades ago in an effort to help seniors on Social Security maintain their buying power in the face of inflation. But a flaw in the way COLAs are calculated often leads to them falling short. That's why senior advocates are pushing for a better way to do things — one that would give beneficiaries more of a fighting chance to keep up financially as their living costs rise.
A new way to calculate COLAs?
Right now, Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the CPI-W points to a rise in the cost of consumer goods, benefits get a bump.
The problem, however, is that the CPI-W doesn't necessarily reflect the costs that seniors face the most. A big influencer of the CPI-W is gasoline prices, for example. But since seniors don't tend to have the same driving and commuting needs as workers, that may not impact them as much.
What does tend to impact seniors, however, is healthcare. Yet Social Security COLAs have not increased at nearly the same rate as healthcare-specific inflation. And as a double whammy, Medicare Part B premium hikes often eat into those COLAs.
That's why advocates have long been pushing for an alternate index on which to base COLAs — the Consumer Price Index for the Elderly (CPI-E). By using an index that measures the costs that are most relevant to seniors, Social Security can help its beneficiaries better keep up with their specific expenses as inflation climbs.
Will more generous Social Security raises help seniors?
While a better system of calculating COLAs could help a lot of seniors on Social Security regain their financial footing, the reality is that they may not do all that much for retirees who use Social Security as their sole income source. And to be clear, even if Social Security changes the way COLAs are calculated, it won't take the place of saving for retirement independently in a 401(k) or IRA.
Changing the source of COLA calculations could help many seniors better maintain their buying power as living costs increase from year to year, especially within the realm of healthcare. And that alone is reason for advocates to keep pushing for change and fighting for ways to help seniors get more out of their benefits.
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