Social Security Benefits Are Losing Buying Power. Here's Why Lawmakers Aren't Fixing the Problem.

If you rely on Social Security or expect to someday, you may be aware that benefits are eligible for an annual cost-of-living adjustment, or COLA. The purpose of COLAs is to help benefits keep up with rising costs.

But while Social Security benefits are designed to keep pace with inflation in theory, recent data shows they’ve been lagging in a serious way. The good news is that lawmakers can do something about it. The bad news is that they don’t seem to be in a hurry to take action.

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Social Security COLAs are failing retirees

Social Security COLAs are supposed to help make sure that seniors can keep up with their expenses. But the Senior Citizens League, an advocacy group, recently found that Social Security benefits have lost a whopping 13.7% of their buying power over the past 10 years. And a flawed COLA formula is largely to blame.

COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers. The problem is that this index tracks the spending habits of working-age households rather than retirees.

Older Americans often spend a larger share of their income on healthcare, prescription drugs, and housing — expenses that have risen faster than inflation in many years. As a result, advocates argue that the current COLA formula doesn’t accurately reflect the costs Social Security beneficiaries actually face.

There’s a potential solution

Advocates recommend that the Social Security COLA formula be based on the CPI-E, or Consumer Price Index for the Elderly. That would likely result in larger COLAs that help seniors better keep up with rising costs.

But making the switch isn’t so simple. For one thing, the CPI-E is considered an experimental index, so lawmakers may not be so quick to embrace it.

An even bigger issue is that Social Security is facing a serious funding shortfall that could result in benefit cuts in roughly six years. Changing the COLA formula to boost annual raises will only put more of a strain on Social Security.

Furthermore, lawmakers are staring down the challenge of preventing Social Security cuts themselves. They may be inclined to put COLA changes on the back burner for a while so they can solve the bigger problem at hand.

In light of that, seniors on Social Security who are struggling to keep up with their bills should look outside of their COLAs to improve their financial outlook. Working part-time — even very part-time — may be a reasonable way for some retirees to increase their income and become less reliant on Social Security COLAs.

Workers, meanwhile, should recognize that those COLAs only go so far. Building savings is a great way to not only supplement Social Security, but keep up with rising costs throughout retirement.

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Social Security Benefits Are Losing Buying Power. Here’s Why Lawmakers Aren’t Fixing the Problem. was originally published by The Motley Fool