Here's Exactly How Much Social Security Benefits Have Lost to Inflation, According to New Data

First, Social Security will only replace about 40% of a typical earner’s
pre-retirement income, according to the Social Security Administration. While
some retirees may be able to work with a pay cut that large, for many, that’s
not enough replacement income to keep up with ongoing bills.

Secondly, Social Security’s annual cost-of-living adjustments (COLAs) have been
causing benefits to lose buying power through the years, and if lawmakers don’t
make a change, that trend could continue or worsen.

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How Social Security COLAs are calculated

Prior to 1975, Social Security COLAs had to be voted in by legislation. But
they’ve been automatic for the past 51 years.

Social Security COLAs are based on annual increases in the Consumer Price Index
for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of
the year. If the CPI-W increases, benefits increase. But if the CPI-W decreases,
benefits stay where they are. There’s no such thing as a negative COLA for
Social Security.

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Why there’s a problem with the current formula

The problem with basing Social Security COLAs on changes to the CPI-W is that
the CPI-W does not measure the costs retirees face specifically. Since the CPI-W
focuses on wage earners, and many Social Security recipients are retirees who
don’t work, there’s a big disconnect.

For example, people on Social Security typically spend a large portion of their
income on healthcare costs. Working people have healthcare expenses as well, but
perhaps not to the same degree. Since healthcare costs have outpaced inflation
broadly in recent years, seniors on Social Security have lost out by virtue of
having their COLAs be based on an index that does not account for that trend.

Here’s how much buying power Social Security benefits have lost

The Senior Citizens League, an advocacy group, did an analysis of Social
Security’s buying power through the years. It found that between 2016 and 2026,
benefits lost about 13.7% of their buying power due to insufficient COLAs.

The group says that for the average Social Security recipient to get the same
value from their benefits today as they did back in 2016, those benefits would
need to increase by $295.85 per month, or about $3,550.20 on an annual basis.

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What Congress can do to make things right

The fact that Social Security benefits have struggled to keep up with inflation
is a huge problem. Many retirees don’t have savings or other income sources to
fall back on. So if their Social Security benefits fail them due to insufficient
COLAs, they’re apt to have a hard time covering their costs.

The Senior Citizens League thinks Congress should approve a one-time stimulus
payment for Social Security recipients to make up for the buying power their
benefits have lost over the past decade. A one-time boost in the amount of
$3,550.20 could serve as a “partial refund” for the insufficient COLAs Social
Security recipients have gotten stuck with.

Congress could also vote to change the way Social Security COLAs are calculated,
shifting the formula from the CPI-W to the Consumer Price Index for the Elderly.
Basing those COLAs on the expenses Social Security recipients tend to incur
could help bridge the aforementioned inflation gap and ensure that healthcare
costs are properly weighted when calculating COLAs each year.

The problem, of course, is that Social Security actually can’t afford to give
out larger COLAs. The program has to follow whatever formula lawmakers have in
place. But shifting to a formula that will likely increase annual raises may
seem like a bad move right now, given that Social Security is facing a massive
funding shortfall that’s already putting the program at risk of benefit cuts.

The Social Security Trustees project that the program could be looking at a
broad 22% cut in benefits by the end of 2032. Boosting COLAs could accelerate
that timeline, which may not help beneficiaries in the long run, even if their
monthly checks were to increase more in the near term.

Bottom line

If you rely on Social Security for income, you may be aware that your benefits
haven’t been keeping pace with inflation despite the fact that you’ve been
getting COLAs through the years. If that’s the case, it’s best to take matters
into your own hands rather than continue to rely on Social Security COLAs.

One option is to boost your income on your own by working in some capacity. That
could mean starting a business, getting a traditional part-time job, or joining
the gig economy.

Reducing spending could also help you stretch your Social Security checks
further. Go through your budget, or create one if you don’t have one yet, and
identify expenses you can cut back on. Even a modest reduction in spending could
help eliminate
some stress living on Social Security.

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