The average Social Security recipient was cheated out of $4,900 in annual income

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Social Security is our nation’s most important social program. According to a February 2020 Center on Budget and Policy Priorities report, Social Security is responsible for lifting 21.7 million Americans out of poverty each year, including 14.8 million in retirement.

Additionally, a large majority of current and future retirees currently rely on, or expect to rely on, Social Security income to make ends meet. In 2021, when national pollster Gallup asked respondents about their reliance on Social Security payments, 89% of current retirees described it as a “major” or “minor” source of income, while an all-time high of 85% of non-retirees expected to rely on the program to some degree during retirement.

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All eyes are on Social Security’s cost-of-living adjustment

Given the importance placed on Social Security payouts, no announcement is more expected each year than the cost of living adjustment, or COLA.

In easy-to-understand terms, COLA represents the annual increase in payments passed on to the more than 65 million program beneficiaries, designed to keep them in line with inflation (i.e. rising prices of goods and services). If the price of a basket of goods and services rises, social security benefits should rise in unison so that retirees can continue to afford those same goods.

Since 1975, the consumer price index for urban wage and office workers (CPI-W) has been the inflationary link of the social security program. Specifically, only the third quarter readings (July through September) are used to determine COLA for future years. If the average CPI-W reading for the third quarter of the current year is higher than the average CPI-W reading for the third quarter of the previous year, recipients will receive an “increase” in the coming year which is proportional to the percentage increase, rounded to the nearest tenth of a percent.

Note that I put “increase” in quotes to indicate that COLA is designed to keep recipients in line with inflation, not to help them move forward. In other words, COLA is not an increase in the true sense of the word.

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Despite huge COLA in 2022, retirees continue to lose

With inflation soaring in the second half of 2021, Social Security recipients are enjoying their biggest payout hike in nearly four decades — a 5.9% COLA. For the average retired worker, that equates to about $92 more each month, or more than $1,100 in additional benefits this year.

Unfortunately, this well-above-average 2021 COLA, and the many COLAs that have preceded it since the turn of the century, are nowhere near keeping pace with the actual inflation that seniors face.

In October, the Senior Citizens League (TSCL), a nonpartisan seniors advocacy group, compared the impact of Social Security COLAs since 2000 to the actual inflation that retirees have faced. The overall COLA increase since the turn of the century (and before the 5.9% COLA announcement) was 55%. This means that the average Social Security benefit has fallen from $816 per month to around $1,262 per month in 2021.

However, the typical expenses that seniors faced over that same 21-year period increased by 104.8% considerably faster. For Social Security benefits to have kept pace with inflation, retirees would have had to receive $1,671 per month in 2021, or about $409 more per month, according to TSCL. When we extrapolate over a year, we are talking about a shortfall of about $4,900 for the average Social Security recipient.

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Here’s why Social Security recipients are harmed by COLA

How does the purchasing power of Social Security income drop by 32% in just 21 years for retirees? The answer is simple: the CPI-W fails to accurately track the inflationary pressures that older people face.

The full name of the CPI-W – Consumer Price Index for Urban Wage and Clerical Workers – offers a huge clue as to why this inflationary tether is failing for the elderly. Urban wage earners and office workers are generally not elderly and rarely receive social security benefits. Therefore, the program is effectively tied to the spending habits of working-age Americans.

Herein lies the problem: people of working age spend their money very differently from retired workers. For pensioners, housing costs and medical care generally represent a higher percentage of total household expenditure than for people of working age. Comparatively, working-age Americans spend more on things like education, entertainment, clothing, and transportation than older people. The CPI-W assigns a higher weight to these less important categories while underweighting expenses such as housing and medical care. The end result is a loss of purchasing power of about $4,900 for the average Social Security recipient over 21 years.

Worse, even though Capitol Hill lawmakers agree that the CPI-W is doing a poor job of tracking inflation for the more than 65 million Social Security recipients, no change is expected anytime soon, mostly because Democrats and Republicans can’t agree on how to fix it. Both sides think they have the solution that will work best, and neither is willing to give an inch or find common ground.

Even with the highest COLA since 1983, recipients should expect their Social Security income to continue to lose purchasing power over time.

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