A lack of inflation adjustment for Social Security is terrible news for the elderly.
Whether you are now retired or just beginning a new job, Social Security may play a prominent role in your financial well-being
. This is because it is the most successful social program in the history of the United States.
85% of non-retirees, according to polls conducted in April 2021 by national pollster Gallup, anticipate relying on Social Security income in retirement. As many as 89% of retired Americans rely on Social Security as either their “main” or “minor” source of income.
The annual cost-of-living adjustment (COLA) report is released by the Social Security Administration (SSA). It receives the most attention because of the significant role it currently plays for most workers in their retirement.
Understanding how the cost-of-living adjustment (COLA) is calculated for Social Security is critical.
COLA is the “rise” recipients get most years to adjust for inflation. Beneficiaries should see a rise in their benefits in line with increases in the cost of goods and services so that they may continue to purchase the same quantity of these items.
To show that this is not a raise in the truest meaning of the term, “rise” has been used in quotation marks. COLA, on the other hand, is only meant to adjust benefits to keep pace with inflation (not help beneficiaries get ahead).
The CPI-W has been used as the inflationary anchor for the program continuously since 1975. Only the CPI-W statistics from the third quarter (July through September) are considered for calculating the cost-of-living adjustment (COLA) for Social Security recipients for the following year. The remaining nine months of the year are not included in the calculation for the cost-of-living adjustment (COLA) that Social Security performs.
Suppose the average CPI-W measurement for the current year is greater than the average reading from the third quarter of the year before. In that case, it is acceptable for beneficiaries to expect a “raise.” However, this only holds if the situation remains the same for the remainder of the year. For more clarity, the rise is rounded to the closest tenth of a percent after being computed using the year-over-year increase in the average Q3 CPI-W measurement.
Even though it seems to be a simple process, something has gone wrong. Since 2000, Social Security recipients’ buying power has decreased by 40%. Social Security’s COLA has done a terrible job of keeping up with inflation for the typical recipient since the turn of the century, even though there is a defined formula for passing on inflationary benefit increases.
Since the beginning of the century, Social Security’s COLA has been unable to keep up with inflation. According to recent statistics published by the nonpartisan nonprofit TSCL, which advocates for older citizens, the purchasing power of monies from Social Security has declined by 40% since the year 2000.
In addition, a Social Security policy analyst at TSCL has documented the most significant 10-percentage-point decline in buying power in the most recent 12-month period (March 2021 to March 2022). It was also pointed out that the cost of home heating oil has increased by 79%, as have some Medicare premiums and out-of-pocket healthcare expenditures that are not included in the COLA calculation for Social Security.
Over the last decade, COLAs have increased monthly payments by 64%. There will be a $1,336.90 rise by 2022 over the average monthly benefit of $816 paid in 2000. According to Johnson’s research, however, payments would need to be increased by 130% to keep up with regular senior spending. A 130% increase in the cost of living since the year 2000 equates to a monthly benefit of $1,876.70. In 22 years, this $539.80 monthly deficit would deprive the typical recipient of approximately $6,500 in disposable income.
There is no simple correction for the incorrect COLA computation.
Look no farther than the CPI-W inflationary tether if you’re wondering how Social Security can fail tens of millions of seniors so terribly.
Urban and clerical employees’ spending patterns are the focus of the CPI-formal W’s name. Senior folks spend their money differently from urban laborers and clerks. For example, seniors spend substantially more of their monthly income on housing and medical care than working-age Americans. Seniors, on the other hand, spend far less on education, clothing, and transportation. CPI-W is Social Security’s tether; thus, necessary expenditures for seniors are not given adequate weight, leading to the loss of buying power for over two decades.
The buying power of Social Security’s monthly payouts will continue to diminish as long as no resolution is reached at the legislative level, as the CPI-W is Social Security’s inflationary anchor.
Most retirees fail to take advantage of the additional $18,984 in Social Security benefits.
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