There are many areas of the Social Security program that require reform, but one of the most urgent concerns is how cost-of-living adjustments (COLAs) are determined. By ensuring that benefits rise in line with inflation, COLAs are meant to protect Social Security’s ability to keep up with rising prices. Many experts, however, contend that the math is incorrect.
The Senior Citizens League reports that since 2000, COLAs have increased Social Security income by 64%; but, over the same period, the median senior’s expenses have increased by 130%. Since COLAs have entirely failed to keep up with growing costs, Social Security payouts have lost 40% of their purchasing power.
Numerous experts are asking for a move that would give retirees thousands of dollars more.
How to compute cost-of-living adjustments (COLAs)
Since 1972, the Social Security Administration (SSA) has used the Consumer Price Index for Urban Wage Earners and Clerical Workers to watch inflation and determine COLAs (CPI-W). The CPI-W from the Q3 of every year is specifically contrasted with the CPI-W from the Q3 of the previous year. The COLA for the next year is the percentage increase, if any.
At first sight, that appears to be fine, however there is an issue. The CPI-W is based on purchases made by office employees and hourly income earners, and working-age people often have different spending habits than seniors do. For instance, the retired population typically spends more on housing and healthcare, whereas the working population typically spends more on schooling, clothes, and transportation.
To that purpose, the Consumer Price Index for the Elderly (CPI-E) is regarded by many professionals and lawmakers as being a superior choice. It naturally accentuates the spending categories that are most pertinent to retirees because it is based on purchases made by people 62 years of age and older.
How much of an impact? Over the past two decades, the average retired worker would have gotten $5,800 more in retirement benefits if the CPI-E had been used to determine COLAs.
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