Many retired Americans have struggled with rising prices in recent years. A survey by the Employee Benefit Research Institute found that 58% of retired workers worry they will have to make substantial spending cuts due to inflation.
Naturally, rising prices have drawn attention to Social Security benefits, often the largest source of income in retirement. Specifically, while Social Security payments get an annual cost-of-living adjustment (COLA) to offset inflation, those adjustments are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Some experts see that as a problem. The CPI-W measures price changes from the perspective of workers, but active workers tend to spend money differently than retired workers and other Social Security recipients.
As a result, experts argue that CPI-W COLAs underestimate rising prices for seniors, such that Social Security benefits are not increasing fast enough to keep pace with inflation. Some Washington lawmakers have proposed solutions to address that problem. Read on to see how two proposals could affect benefits.
Image source: Getty Images.
1. Calculate Social Security COLAs using the CPI-E
The Consumer Price Index for the Elderly (CPI-E) measures price changes from the perspective of individuals 62 or older. The Social Security Administration (SSA) estimates that replacing the CPI-W with the CPI-E would increase COLAs by an average of 0.2 percentage points per year. Several bills proposing that change have been introduced in Congress, including the recent legislation listed below.
- Social Security Expansion Act: Introduced by Sen. Bernie Sanders (I-Vt.) in February 2023.
- Protecting and Preserving Social Security Act: Introduced by Sen. Mazie K. Hirono (D-Hawaii)and Rep. Ted Deutch (D-Fla.) in June 2022.
Experts argue the CPI-E is a better measure of inflation for the Social Security program because more than 85% of beneficiaries are 62 or older, and the CPI-E emphasizes spending categories most relevant to seniors. Specifically, it puts more emphasis on housing and medical care, and less emphasis on transportation, tuition, and food and beverages.
The chart below compares the actual CPI-W COLAs to theoretical CPI-E COLAs over the last decade. It also shows the total COLA for each method at the bottom.
|
Year |
CPI-W COLA |
CPI-E COLA |
|---|---|---|
|
2015 |
1.7% |
2% |
|
2016 |
0% |
0.6% |
|
2017 |
0.3% |
1.5% |
|
2018 |
2% |
2.1% |
|
2019 |
2.8% |
2.6% |
|
2020 |
1.6% |
1.9% |
|
2021 |
1.3% |
1.4% |
|
2022 |
5.9% |
4.8% |
|
2023 |
8.7% |
8% |
|
2024 |
3.2% |
4% |
|
Total COLA |
30.8% |
32.7% |
Data source: Social Security Administration, U.S. Bureau of Labor Statistics.
For anyone doing the math at home, the values in each column must be multiplied (not added) to find the total COLA because each year compounds on the previous year.
As shown above, Social Security benefits would be 1.9% higher today if the CPI-E had been used to calculate COLAs during the past decade (i.e., 32.7% minus 30.8%). In that scenario, the average retired worker would have received an additional $2,689 in total benefits over the last 10 years.
2. Calculate COLAs using the CPI-E and the CPI-W
A more aggressive solution would calculate COLAs using whichever measure of inflation was higher (CPI-W or CPI-E) in a given year. The SSA says that method would increase COLAs by an average of 0.3 percentage points per year. The only recent legislation to propose that change is listed below.
- Social Security 2100 Act: Introduced by Rep. John Larson (D-Conn.) and Sen. Richard Blumenthal (D-Conn.) in July 2023.
The chart below compares all three COLA calculation methodologies discussed in this article.
|
Year |
CPI-W COLA |
CPI-E COLA |
Higher COLA |
|---|---|---|---|
|
2015 |
1.7% |
2% |
2% |
|
2016 |
0% |
0.6% |
0.6% |
|
2017 |
0.3% |
1.5% |
1.5% |
|
2018 |
2% |
2.1% |
2.1% |
|
2019 |
2.8% |
2.6% |
2.8% |
|
2020 |
1.6% |
1.9% |
1.9% |
|
2021 |
1.3% |
1.4% |
1.4% |
|
2022 |
5.9% |
4.8% |
5.9% |
|
2023 |
8.7% |
8% |
8.7% |
|
2024 |
3.2% |
4% |
4% |
|
Total COLA |
30.8% |
32.7% |
35.2% |
Data source: Social Security Administration, U.S. Bureau of Labor Statistics.
Naturally, calculating COLAs using the higher inflation measure (CPI-W or CPI-E) results in the largest possible benefit increase. Payments would be about 4.4% higher today if that method had been used during the last decade, rather than the CPI-W method stipulated by current law. In that scenario, the average retired worker would have received an additional $3,788 in Social Security benefits over the last 10 years.
Social Security beneficiaries shouldn’t expect COLA changes in the near future
The Social Security COLA formula is unlikely to change anytime soon. Yes, lawmakers in Washington have proposed a raft of changes, but the Social Security program is facing a serious financial problem.
The Old-Age, Survivors, and Disability Insurance (OASDI) trust fund — the source of Social Security benefits for retired workers, spouses, survivors, and disabled workers — could be depleted within the next decade. If that happens, benefit cuts of at least 20% would take effect automatically. Any changes that increase COLAs would only make the problem worse and accelerate the time to trust fund depletion.
That doesn’t mean the Social Security COLA formula will never change. But lawmakers will almost certainly deal with the most pressing problem first, and the possible insolvency of the OASDI trust fund is undoubtedly a more pressing problem.