Social Security is a major benefit for most older Americans. For many retirees it’s their largest source of retirement income. Over half of retirees say half of their income comes from Social Security and a third of retirees say 90 percent of their income is from Social Security benefits. One of the benefits of Social Security is that benefits are increased annualy to account for the rising cost of living.
What Is The Cost Of Living Increase?
This increase, also known as the Social Security COLA, increases the monthly Social Security payment that retirees receive based on rising prices. It’s based upon the Consumer Price Index for Urban Wage Workers, more commonly referred to as the CPI-W. This Social Security increase can sometimes go up quite a bit (such as 5.8 percent in 2008), but most of the time, it’s fairly minimal. There have even been some years with no increase at all, three of them just since 2009. Lower gas prices were the major culprit in 2015, the most recent year with no increase.
Why The CPI-W Matters
The CPI-W includes many items that tend to impact working-class folks who still have a job and go into an office or factory each day. Things like transportation costs, gas, food, beverages and apparel are a major part of the calculus with the CPI-W, and these costs tend to be given a higher weight in the CPI for urban workers. These are all expenses that will frequently go down for retirees, as there is no need to drive to work on a daily basis. Also, eating out and purchasing new clothes will also generally go down after retirement. However, there is also a Consumer Price Index for the Elderly, also known as the CPI-E. This particular number does not come into play when it comes to adjusting the Social Security COLA each year.
The Consumer Price Index For The Elderly
When one looks at the Consumer Price Index for the Elderly, it’s easy to see that housing costs make up a higher percentage of overall costs for retirees. Housing makes up about 44.5 percent of household spending for seniors, compared with only 39.2 percent for those who are of the traditional working age. This difference makes a big impact when accounting for the annual increase that Social Security recipients can expect to get.
Additionally, one big expense that’s not as high for working-age Americans as it is for retirees is the cost of healthcare. The cost of healthcare has gone up exponentially over the past few decades, but retiree health care costs have come to take up a much larger chunk of household income for older Americans. Seniors are likely to spend about 11.3 percent of their overall expenses on healthcare, whereas working people only have about 5.6 percent of their expenses made up from healthcare costs.
Why This Matters
Because of the use of the CPI-W, expenses that seniors are not likely to experience still make a major impact on the annual Social Security increase. As they have not gone up as much in recent years, the increases for retirees have been quite paltry and do not actually keep up with the expenses they actually incur. This situation leads to less purchasing power over time and a lower standard of living for retirees.
It Gets Even Worse
One of the biggest problems that this use of the CPI-W over the CPI-E for determining the Social Security COLA each year is what’s entirely left out. For example Medicare premiums, which are one of the biggest components of retiree health care costs, are not included in the CPI-W at all. In spite of this, Medicare premiums increased 131 percent between 2000 and 2015. In contrast, Social Security payments went up by only 43 percent over the same time period. This means that healthcare premiums grew more than three times as fast as the average Social Security benefit, taking an even bigger bite out of the income that retirees rely upon.
Monthly housing expense increases for those who owned their homes were nearly inline with the Social Security increase over the 15-year period noted above. However, for those who rented, the average rent payment went up by 56 percent, which was higher than the Social Security increases provided. Therefore, housing is taking a larger portion of retirees income today.
By using the CPI-W, retirees get a regular cost of living increase. However, this increase does not actually maintain the purchasing power that retirees can enjoy over time. This situation is compounded by the fact that major medical costs are given a lower weighting and some, like Medicare premiums, are not included at all in the calculations.