The cost of living adjustment for Social Security in 2020 was announced earlier this month, and while the 1.6% increase to monthly check is nice, the tiny bump in payments may be revealing a bigger issue within the system.
The U.S. Bureau of Labor Statistics’ September inflation data is used when determining COLA, and the 2020 increase of 1.6% will amount to around $24 extra per check for more than 64 million beneficiaries. This data may be problematic because it only looks at readings from the July-September.
But the bigger problem lies within this actual index used to determine the yearly raise. The CPI-W, or Consumer Price Index for Urban Wage Earners and Clerical Workers, has been in use since 1975, and it essentially breaks down all spending into eight categories with a multitude of subcategories to arrive at an aggregate inflation number for each month.
But the CPI-W is analyzing data for urban and clerical workers, and many senior citizens don’t fall into that category, so the data is obviously flawed.
The BLS did compare the CPI-W to an experimental index from December 2011, the CPI-E, or Consumer Price Index for the Elderly. This index focused only on households aged 62 and older, and the findings were remarkable, per The Motley Fool:
What the BLS found was that CPI-E spending on medical care was double that of the CPI-W, with housing costs also notably higher. This tells us that the CPI-W is regularly underweighting the true inflation seniors contend with in regard to medical care and housing costs, while granting higher weighting to categories that don’t matter much, such as apparel and education.
The Senior Citizens League analyzed the 2020 COLA (as they have done in the past), and its study found that extremely low COLAs over the last decade have lost seniors thousands in benefits. In the previous decade (2000-09), COLAs averaged 3%, while this decade’s (2010-19) average is a paltry 1.4%.
Mary Johnson, analyst at TSCL, found purchasing power of Social Security has decreased 18% over the last 10 years. That amounts to $15,258 in losses over the last decade for a beneficiary receiving an average check of $1,075 in 2009.
TSCL’s analysis says that a COLA should not average lower than 3% in any year to lessen the drain of retirement savings on seniors, and in order to keep the elderly out of poverty.
And while Congress agrees that low COLA is an issue for Social Security, it isn’t doing much about it. Both Democratic and Republican parties agree the CPI-W is insufficient, but their disagreements regarding other facets of the benefits program is holding back any progress.
Democrats want to replace the CPI-W with the CPI-E in determining Social Security inflation, but Republicans want to replace the index with something called Chained CPI.
The Chained CPI takes into account the idea of substitution bias, whereby a consumer trades down to similar goods or services because of inflation (e.g., buying pork or chicken if ground beef prices rise). Though this is a real-world consumer reaction to higher prices, no other inflationary index accounts for substitution bias. Thus, switching to the Chained CPI would likely reduce the COLA — and therefore purchasing power — even more than under the CPI-W.
COLA is clearly in need of some kind of reform, but a fix may not be in the cards for a long time. Maybe the best solution is to take that extra $24 a month in 2020 and pretend it doesn’t exist.