Social Security is one of America’s most beloved programs (if not the most beloved) for a reason: It supports millions of retired workers. Despite the importance and constant reminders to active workers to save and invest for retirement (in accounts like 401(k)s and IRAs), the reality is that government programs are the only income for much of the world. Americans age 62 and older. But this is not the worst, those payments are becoming less and less due to inflation.
The nonpartisan Senior Citizens League claimed that Social Security recipients have lost 36% of their purchasing power since the year 2000. What’s particularly shocking about that number is that it comes shortly after adjusting for the cost of living. COLA, the most generous program in decades.
Even though benefits grew 8.7% per month for this year, long-term Social Security recipients have lost a lot of purchasing power over the past 23 years. And worst of all, this trend is likely to continue unless lawmakers act.
Where could be the error? Social Security COLAs are calculated based on data from the third quarter of the Consumer Price Index for Urban Salaried and Clerical Workers (CPI-W). These figures are misleading, especially because while it seeks to ensure that benefits do not lag behind due to inflation, it should be taken into account that unlike active workers, retirees generally do not have a second source of income.
According to the experts of this organization, the expenses faced by urban salaried and white-collar workers do not match well with the expenses that older people usually have to bear.
For example, the price of gasoline is a big driver of the CPI-W. The problem is that retired seniors don’t spend that much money on gas, because many people don’t work and don’t drive very far. Therefore, there is a clear mismatch when it comes to calculating Social Security COLAs. And because of this flawed system, senior citizens are paying the price in the form of average salary hikes that really can’t keep up with inflation.
Leading advocates have pushed lawmakers to adopt a different tool for calculating the Social Security increase: the Consumer Price Index for the Elderly (CPI-E). A specific index for seniors may put more emphasis on costs Social Security recipients are likely to incur and may be seen as onerous expenses, such as health care, which is often a major expense for seniors. And if advocates push the CPI-E, there’s a chance that lawmakers will eventually try to use it for COLA purposes.
In order not to become dependent on government measures, active workers should keep in mind that by the time they retire, Social Security benefits will certainly continue to lose more purchasing power, so saving for retirement is essential.