Will Social Security change the way it’s calculated? Here’s why it should – Community News
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Will Social Security change the way it’s calculated? Here’s why it should

After years of stingy adjustments to the cost of living, or COLAs, it finally looks like Social Security seniors will be eligible for a big raise in 2022. That’s because inflation has been unusually high in recent months. If that trend continues into the next part of the year, it could result in a significant increase in retirement benefits in January.

But while a nice annual benefit increase may seem like a good thing, many experts agree that the way Social Security increases are calculated is flawed.

How should you measure inflation?

Social Security COLAs have been calculated for years on the basis of third-quarter figures from the Consumer Price Index for urban wage earners and white-collar workers (CPI-W). When the CPI-W indicates that the total costs of a package of general goods and services have increased, the benefits get a boost.

Social Security Card

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But there’s a big problem with using the CPI-W for that calculation, and it’s the whole “urban wage earners and white-collar” aspect. As a rule, retirees are not urban wage earners or white-collar workers. As such, the costs that most affect the CPI-W do not accurately reflect the things seniors spend the most money on.

Take gasoline for example. If you’re no longer working full-time, rest assured that fuel will generally be a smaller expense for you than the average worker with a daily commute. But every year, the price of gasoline plays a big part in determining whether seniors end up with a COLA, and how big that COLA is, even though gas isn’t something retirees typically spend a lot on.

In contrast, older people need more health care than the average American of working age. But as a factor in the CPI-W, medical costs are underweight relative to how much of their money seniors spend on it.

So what’s the solution? The most obvious comes down to using a more appropriate index to calculate COLAs – the Consumer Price Index for the Elderly (CPI-E).

Between 1982 and 2011, the CPI-W grew at an average of 2.9% per year, while the CPI-E grew at 3.1%. Now that spread may not seem so great. But those small annual differences add up over the years. Seniors today would receive significantly larger monthly checks if the CPI-E had been used to determine what Social Security’s annual COLAs looked like.

The CPI-E, as the name implies, is a senior-oriented index. So it would make sense to use it in the context of adjusting benefits specifically for seniors.

Some lawmakers have been pushing for this change for years — to no avail. At the same time, Social Security controls have lost real buying power in recent decades.

By 2022, Social Security recipients will be more than happy with the COLA they receive. But that doesn’t change the fact that sticking to the CPI-W does seniors a disservice.

A major reason why inflation is currently rampant is that the pandemic devastated global supply chains and disrupted much economic activity. Its impact continues to ripple around the world. But as many people and businesses seek to return to their former normal behavior, businesses are finding it difficult to adapt quickly enough to keep up with the revival in consumer demand.

Once that situation normalizes, inflation could ease back and COLAs could easily return to their former miserly levels, causing seniors who rely heavily on Social Security to see the true value of their monthly benefit checks steadily decline.