retirement

1 Change Joe Biden Could Do To Help Seniors Receive More Social Security

Kristin Hitchcock

Published: June 27, 2024 2:53 pm

Social Security serves as the foundation for many seniors’ retirement. It provides essential income for seniors during their golden years so that they can maintain their quality of life. Sadly, though, Social Security doesn’t always deliver on this promise, as inflation erodes more and more of this program’s purchasing power.

According to the Social Security Administration, in 2023, over 65 million Americans received Social Security benefits. These benefits play a vital role in senior financial security, with nearly half (41%) of beneficiaries relying on Social Security for at least half of their income.

The current method for adjusting Social Security benefits, the Cost-of-Living Adjustment (COLA), relies on the Consumer Price Index (CPI) to measure general inflation. Then, Social Security is adjusted in accordance with this inflation. However, this index doesn’t reflect the buying patterns of seniors, who tend to spend a much larger portion of their income on healthcare.

You can learn more about how COLA works in our Social Security guide. 

To ensure a secure retirement for all seniors, the government should increase Social Security benefits by automatically adjusting the COLA (Cost-of-Living Adjustment) based on the CPI-E, which specifically measures what seniors spend money on, such as healthcare. 

Rising Healthcare Costs

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Seniors tend to spend a lot of their income on healthcare costs compared to the overall population. A report by Fidelity Investments estimates a single person aged 65 in 2023 may need approximately $157,500 saved for future healthcare expenses. Of course, for many individuals, this number ends up being far higher.

Overall, healthcare costs tend to far outperform inflation. Healthcare spending for seniors has increased substantially, especially as people live longer and longer. It doesn’t take much imagination to figure out that seniors spend more money on their healthcare than the average consumer family. They simply NEED more care.

Because healthcare costs tend to grow faster than inflation, COLA does not meet the needs of seniors, especially those with complex medical needs. More and more seniors are finding their healthcare costs to be a burden and far more than they can cover with Social Security, even if they have a nice nest egg, too.

Struggling to pay medical bills isn’t just a financial burden, either. Seniors may be unable to take their medication as prescribed due to financial difficulties, or they may be forced to choose between their medications. Some may put off seeing the doctor or non-emergency surgeries, leading to increased medical problems further down the line.

The Downsides of the Current COLA

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COLA was designed to ensure that Social Security could keep up with inflation, helping seniors maintain their purchasing power over the years. However, how COLA currently runs has serious limitations in keeping up with how seniors are spending their money.

The COLA relies on the Consumer Price Index (CPI) to measure inflation. The CPI tracks a broad basket of goods and services, including housing, food, and transportation. It’s meant to track what the average consumer family is purchasing.

While this provides a general picture of inflation, it may not accurately reflect the spending patterns of seniors. Seniors typically allocate a much larger portion of their income toward healthcare compared to the average population. They also tend to spend less on things like children’s items, as their kids have typically flown the coop.

The CPI does include healthcare, but at a much lower percentage than seniors often spend. As we’ve discussed, seniors tend to spend a larger portion of their income on healthcare, and the CPI doesn’t consider this factor.

The CPI also follows a process called “substitute bias.” Simply put, the index assumes that people will purchase cheaper alternatives as prices go up. However, cheaper alternatives for healthcare just aren’t possible in many cases! Therefore, healthcare tends to cost more than the CPI thinks it does.

As a result of this mismatch, Social Security has slowly had its purchase power eroded. Seniors simply cannot purchase the same amount of stuff on their benefits than they could decades ago. Social Security benefits are not going as far as they once did.

The Benefits of a CPI-E Adjusted COLA

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There are many ways that COLA could be adjusted to take healthcare expenses into account. For one, senior CPI could be used, which considers what Americans 62 and older spend their money on. COLA could also be adjusted specifically for healthcare inflation. 

Either way, this sort of adjustment would have many benefits for those receiving Social Security:

• Improved Financial Security: By addressing healthcare inflation directly, this adjustment would ensure that seniors maintained their purchasing power for medical necessities. It reduces the risk of financial hardship for seniors. 
• Reduced Stress: Financial hardships can be a huge source of stress for seniors. Automating COLA adjustments for healthcare can provide peace of mind, knowing their Social Security benefits will automatically adapt to cover increased medical expenses.
• More Predictable Budgeting: If Social Security benefits adjust to cover healthcare costs, seniors can depend more on their benefits and accurately budget for the future. Otherwise, surprise medical bills can throw even the best budget for a loop. 
• Improved Health Outcomes: When seniors can get the care they need, they’re less likely to have worse health problems later on. This reduces the load on Medicare and other insurance plans, which are often subsidized off taxes. 

Tipping COLA more towards healthcare can help seniors stay ahead of their expenses and ensure they have the funds necessary to afford their medical bills. 

The Downsides of a CPI-E COLA

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Of course, if a healthcare-adjusted COLA was all good, it would likely be implemented by now. Proponents of this change cite several potential downsides of making the current COLA more aligned with healthcare costs:

• Financial Sustainability: The system of taxes currently used to fund Social Security is only expected to be enough to pay for 75% of the program’s expenses by 2035. This is largely due to the country’s lower birthrate, which leaves fewer young people paying taxes. There is a constant question of the sustainability of the Social Security program, and increasing benefits will only irritate that problem more. 
• Data Accuracy: Getting accurate data for healthcare costs can also be challenging. It would require using a different inflation index or developing a new system altogether. 
• Potential for Abuse: Some opponents argue that the system may be misused by an ever-widening definition of “medical costs.” They argue that seniors should plan for increased healthcare costs, as the need for more healthcare with age is well-documented. 

Addressing these concerns is important to create a sustainable system that works for all seniors (present and future).