The Social Security program is an important source of income for many Americans. Nearly 66 million people — about 20% of the U.S. population — received Social Security benefits in November, and nearly 9 in 10 retired workers depend on those monthly checks to make ends meet.
Over the past year, the rising costs of gas, groceries, and other necessities have drawn attention to a potential problem: Social Security benefits may be losing buying power. Of course, the Social Security Administration uses annual cost-of-living adjustments (COLAs) to keep benefits in lockstep with inflation, but many policy experts and politicians argue that COLAs have failed to achieve that goal because they are based on a flawed methodology.
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How cost-of-living adjustments are calculated
Social Security’s annual COLAs are based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Specifically, the CPI-W in the third quarter of the current year is compared to the CPI-W from the third quarter of the previous year, and the percentage increase (if any) becomes the COLA for the next year. For example, the CPI-W increased by 8.7% year over year in Q3 2022, so Social Security recipients’ benefits were increased by 8.7% in 2023.
However, the CPI-W measures a market basket of goods and services that is based on the spending patterns of workers. Those workers are generally younger than most Social Security beneficiaries, and people who are still in the workforce generally spend their money differently than seniors do. As a result, the CPI-W overemphasizes spending categories that are less important to seniors (e.g. transportation, apparel, education), but underemphasizes spending categories that seniors spend more on (e.g. housing, medical care).
Another way to measure inflation
Policy experts and politicians frequently point to the Consumer Price Index for the Elderly (CPI-E) as a better measure of how inflation impacts seniors. The CPI-E is designed to track the spending patterns of people 62 and older, and puts more weight on the prices in categories that are most relevant to them.
How big is the difference? According to The Senior Citizens League, the CPI-E on average finds annual inflation to be 0.2 percentage points higher than the CPI-W. That same figure has been cited by the Office of the Chief Actuary, a government agency responsible for statistical estimates related to the Social Security program. And while 0.2 percentage points may sound like a small number, small disparities can compound significantly over time.
Based on that assumption, many politicians have proposed legislation that would replace the CPI-W with the CPI-E in Social Security’s COLA calculations. But Social Security beneficiaries should examine the data a little more closely.
How much buying power have Social Security benefits lost?
The chart below details the third-quarter changes in the CPI-W and CPI-E for each year over the past two decades. In other words, the CPI-W column represents the actual COLA that was applied to benefits in the following year, while the CPI-E column represents the COLAs that would have been applied to benefits if Congress changed the way the Social Security Administration measures inflation.
Year
CPI-W
CPI-E
2003
2.1%
2.4%
2004
2.7%
3.1%
2005
4.1%
3.7%
2006
3.3%
3.4%
2007
2.3%
