Whether you’re currently retired or just entering the workforce, there’s a good chance that America’s most successful social program, Social Securityis going to play a key role in your financial well-being.
According to surveys conducted by national pollster Gallup in April 2021, 85% of non-retirees expect to rely on their social security income to some degree to make ends meet during retirement. This is somewhat comparable to the 89% of pensioners surveyed who already relied on social security as a “major” or “minor” source of income.
Due to the critical role that social security will play / play for most retired workers, no Communication from the Social Security Administration is more closely monitored than the Annual Cost of Living Adjustment (COLA).
What is the social security cost-of-living adjustment and how is it calculated?
In short, COLA is the “increase” that the recipients get the most years to take into account inflation. If the price of goods and services increases compared to the previous year, the recipients should receive a corresponding increase in benefits so that they can still afford the same amount of goods and services.
You will also notice that I have put “raise” in quotation marks to represent that this is not an increase in the true sense of the word. Instead, COLA is simply designed to secure benefits to match the current inflation rate (not help recipients move forward).
Since 1975, the CPI-W Consumer Price Index for Employees and Office Workers (CPI-W) has been the inflationary tether of the program. To determine the social security COLA for the coming year, only third-quarter CPI-W readings (July to September) are used. The other nine months may be useful in identifying trends, but they will not take into account Social Security’s COLA calculation.
If the average CPI-W reading from the third quarter of this year is higher than the average CPI-W reading from the third quarter of the previous year, recipients will be queuing up for an “increase”. The size of the increase is the percentage increase from year to year in the average CPI-W reading for Q3, rounded to the nearest tenth of a percent.
It all sounds very straightforward, yet it has gone awry.
Social security recipients have lost 40% of their purchasing power since 2000
Despite having a clear formula for passing on inflationary gains, Social Security’s COLA has done a bad job to keep pace with the inflation that the average social security recipient has struggled with since the turn of the century.
According to one new report issued by non-partisan senior advocacy group The Senior Citizens League (TSCL), the purchasing power of social security dollars has fallen by as much as 40% since 2000, from March 2022.
For extra context, the 10 percentage point loss of purchasing power over the most recent 12-month period (March 2021 to March 2022) is the largest ever recorded by Mary Johnson, a social security policy analyst for TSCL. Johnson highlighted a number of rapidly rising costs over the past year that have led to this loss of purchasing power, including a 79% increase in expenses for domestic heating oil, as well as certain Medicare premiums and out-of-pocket health expenses. t part of Social Security’s COLA calculation.
Since 2000, the total increase in monthly benefits through COLAs is 64%. This means that the average monthly benefit has increased from $ 816 in 2000 to $ 1,336.90 in 2022. However, Johnson’s study showed that a 130% increase in payouts was needed just to keep up with typical senior spending. A COLA of 130% since 2000 provides a monthly benefit of $ 1,876.70. This monthly deficit of $ 539.80 equates to nearly $ 6,500 in lost annual purchasing power for the average 22-year-old recipient.
The COLA calculation is deficient and there is no easy solution
If you’re wondering how it is possible for Social Security to fail tens of thousands of seniors so seriously, look no further than its inflationary tetheringCPI-W.
As its official name suggests, CPI-W measures the consumption habits of city and office workers. The problem is that city and office workers spend their money very differently than senior citizens. For example, a much larger percentage of seniors’ monthly expenses for shelter and expenses for medical care go toward Americans of working age. By comparison, the latter spend far more on education, clothing and transportation than seniors. Because CPI-W is the tethering of Social Security, important costs for seniors are not weighted enough, which has resulted in the sustained loss of purchasing power for more than two decades.
Interestingly, lawmakers from both major political parties acknowledge that the CPI-W is doing a poor job of accurately tracking inflation. The legislators have, however approached to solve the problem from each end of the political spectrumand have hitherto been reluctant to give up an inch to find common ground with their resistance.
As long as there is no compromise at the congressional level, social security will be stuck with the CPI-W as its inflationary binding, and recipients will continue to see the purchasing power of their monthly benefits. eroded over time.
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