Social Security Has Lost 14% of Its Buying Power Since 2016. That’s About $290 a Month on Today’s Average Check
Social Security's cost-of-living adjustments were built to shield retirees from inflation, yet seniors keep falling further behind year after year. Understanding exactly why that gap keeps growing reveals an uncomfortable truth about the program's future.
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There are millions of Americans today who rely heavily on Social Security to make ends meet in retirement. In fact, the Senior Citizens League estimates that 24.6 million seniors rely on Social Security for 100% of their income.
The problem is that Social Security isn’t designed to replace workers’ paychecks in full. For those earning an average wage, Social Security might replace roughly 40%. Most seniors, however, can’t manage well on a 60% pay cut, which is why not having outside income is a problem.
But that’s not the only issue with retiring on Social Security alone. Another big problem is that the program’s cost-of-living adjustments, or COLAs, have failed to keep up with inflation despite being designed to do just that. That failure has caused beneficiaries to lose out on loads of buying power through the years.
Benefits haven’t been keeping up
Despite being eligible for some fairly generous COLAs in recent years, Social Security benefits have lost almost 14% of their buying power since 2016, reports the Senior Citizens League. And the reason largely boils down to a flaw in the way those COLAs are calculated.
Social Security COLAs are based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But while the CPI-W may do a good job of capturing the costs of working Americans, it doesn’t accurately reflect the way seniors on Social Security tend to spend their money.
Social Security recipients, for example, commonly spend a large share of their benefits on healthcare costs, including Medicare premiums. But healthcare has outpaced broad inflation in recent years, creating a huge disconnect.
Based on the Senior Citizens League’s findings, the average benefit today would need to rise by about $290 to make up for the buying power it lost over the past decade.
Can something be done?
The fact that Social Security benefits can’t seem to keep up with inflation is hurting seniors. And the truth is that lawmakers can take action to prevent that from continuing.
A good solution is to base Social Security COLA on an index specific to seniors, like the experimental Consumer Price Index for the Elderly (CPI-E). Of course, this change wouldn’t make up for the buying power benefits lost in the past. But it could prevent benefits from losing buying power in the future.
However, a change of this nature may not be so imminent. For one thing, the CPI-E doesn’t have the same clout, so to speak, as the CPI-W, and lawmakers may be hesitant to base COLAs on an index that’s still considered experimental.
Secondly, Social Security is facing a major funding shortfall that could result in significant benefit cuts in the near future. If Congress were to vote to change the COLA formula so that benefits get a larger boost, it could push Social Security closer to insolvency.
To put it another way, Social Security can’t afford larger COLAs based on its current financial situation, even though recipients clearly deserve them. As such, benefits may continue to lose buying power over time.
The best way for seniors to combat that is to have savings and investments to fall back on in addition to Social Security. The right portfolio could be designed to beat inflation so that even if Social Security benefits fall short, buying power isn’t consistently being lost overall.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
