Whether you're already retired and receiving a Social Security benefit or preparing to enter the workforce for many decades to come, there's a good chance America's top retirement program will help you cover part of your expenses during your golden years.
For the past two decades, Gallup has been polling retired workers to gauge their reliance on Social Security. Every year, between 80% and 90% of retirees respond that Social Security accounts for a “major” or “minor” source of income. Meanwhile, 76% to 88% of nonretirees expect to lean on their Social Security payout in some capacity when they do hang up their work coats for good.
Unfortunately, data shows that the program's more than 66 million current beneficiaries are being cheated out of a significant portion of their potential income.
The CPI-W plays a critical role in passing along “raises” most years
One of the key mechanisms that makes Social Security “tick” is its annual cost-of-living adjustment (COLA). The program's COLA is designed to measure the inflation — the rising price of goods and services — beneficiaries have dealt with and pass along a “raise” (most years) to compensate. In other words, Social Security's COLA is what helps seniors, survivors, and long-term beneficiaries with disabilities maintain their standard of living as the price for goods and services climbs over time.
The tool responsible for tracking inflation for America's top retirement program is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Before 1975, special sessions of Congress arbitrarily increased benefits for program recipients. Since then, the CPI-W has done the heavy lifting on an annual basis.
The CPI-W has a handful of major spending categories and a laundry list of subcategories, each with their own respective percentage weightings. These weightings allow the CPI-W to be expressed as a single number, which can then be compared to the previous month, year, or whatever time frame you choose, to determine if prices are collectively rising or falling.
For the sake of Social Security, only the CPI-W readings from the third quarter (July through September) matter in determining the cost-of-living adjustment for the following year.
While this all sounds pretty straightforward, something has gone amiss, and it's hurting Social Security recipients big time.
The average Social Security beneficiary is losing out on almost $6,500/year in income
Ideally, the CPI-W is going to perfectly track the inflation all 66 million-plus beneficiaries contended with during the third quarter. But the real-world data shows this isn't happening.
Last year, The Senior Citizens League (TSCL), a Virginia-based nonpartisan group focused on issues affecting seniors, released a study showing that real-world expenses facing program recipients have vastly outpaced COLAs passed along since this century began.
Through March 2022, the cumulative “raise” passed along to the average Social Security beneficiary was 64% since the beginning of 2000. In other words, the $816 average monthly benefit that was paid in January 2000 had grown to just shy of $1,337 by 2022. However, due to shelter, food, energy, and medical care expenses growing rapidly over the past two decades, the typical expenses seniors have faced since the beginning of 2000 grew by an unsightly 130%, or more than double the cumulative COLA they received over the same time frame.
According to TSCL, the average Social Security check of $816 in 2000 would have needed to grow to about $1,877 last year just to keep pace with the rising costs seniors have been dealing with. In aggregate, the average Social Security check is $539.80 shy of where it needs to be each month, or $6,478 per year, to have kept pace with inflation since 2000.
Here's why Social Security is shortchanging the recipients it was designed to protect
How can things be so amiss with Social Security's annual COLA? Look no further than the CPI-W.
Without question, going from arbitrary cost-of-living adjustments via special sessions of Congress to an annual COLA tool with the CPI-W in 1975 was a massive improvement for Social Security. However, the CPI-W has inherent flaws that are clearly hurting the retirees who rely on their monthly benefit to make ends meet.
The biggest flaw with the CPI-W is given away in its full name: Consumer Price Index for Urban Wage Earners and Clerical Workers. Urban wage earners and clerical workers are usually working-age Americans who aren't receiving a Social Security benefit. It means the inflationary tool responsible for passing along annual “raises” most years is basing those increases on the spending habits of a very small percentage of Social Security's beneficiaries. That's a big problem for seniors, who have a higher percentage of their expenditures tied up in shelter costs and medical care expenses than the average worker.
Perhaps the most disappointing aspect of the average Social Security beneficiary being cheated out of $6,478 in annual income since 2000 is that lawmakers from both sides of the political aisle are aware of the issue, yet haven't made any progress resolving it.
Both Democrats and Republicans on Capitol Hill agree that the CPI-W is flawed. The problem is their respective solutions to replace the CPI-W come from opposite ends of the political spectrum.
Democrats have proposed switching to the Consumer Price Index for the Elderly (CPI-E), which would strictly track the spending habits of seniors and almost assuredly increase annual COLAs above their current trajectory with the CPI-W. Of course, choosing the CPI-E to replace the CPI-W would mean even more long-term outlays for a program staring down a $20.4 trillion cash shortfall through 2096.
Meanwhile, Republicans prefer using the Chained CPI, which factors in substitution bias — i.e., the ability of consumers to trade down to a similar good or service if one becomes too pricey. With the Chained CPI, annual COLAs would likely come in even lower than with the CPI-W over time.
Without bipartisan cooperation in the Senate, there's absolutely no chance of resolving this ongoing loss of purchasing power for Social Security's beneficiaries.
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