Social Security retirees receive a cost-of-living adjustment (COLA) to their retirement benefits in most years. This is meant to help them maintain their buying power even as prices go up. Without these COLAs, retirees would be able to afford less and less each year since costs don't just stay stagnant.
Unfortunately, there's a problem with the way the COLA is calculated, which has resulted in Social Security benefits increasing too slowly to actually keep pace with the inflation seniors are experiencing. And, with recent news from the Social Security trustees about the troubled state of the program's financial future, it's unlikely that problem with the COLA is going to be corrected anytime soon.
Here's what the issue is, along with some details about why fixes most likely aren't on the horizon.
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Retirees lose ground because the COLA formula is faulty
The big problem with the COLA formula is easy to understand once you know how the cost-of-living adjustment is calculated for retirees.
Their annual Social Security raise is based on year-over-year changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That probably seems odd to you, since most seniors are neither urban wage earners nor are they clerical workers. In fact, their spending habits are pretty different from this group, with most retirees generally spending more on things like housing and healthcare -- two areas where inflation often outpaces the average price increases. As a result, the rise in costs they experience is not accurately reflected by the CPI-W.
This is actually a really big problem, as the Senior Citizens League found Social Security benefits have lost about 36% of their buying power since 2000.
Now, there are some proposed fixes, such as switching to a different consumer price index that could result in larger raises for retirees. But it's very unlikely that any positive changes are going to happen thanks to a new report from Social Security's trustees.
Here's why the Trustees Report could make fixing the COLA problem harder
Unfortunately, the 2024 report from Social Security's trustees shows that the retirement benefits program isn't exactly flush with the cash that it would need to offer retirees bigger benefits to make up for their decline in buying power.
In fact, the combined trust fund for the retirement and disability benefits systems is expected to run dry in 2035. If and when that happens, benefits could be paid only out of current revenue collected, which provides only enough to fund about 83% of the promised amount of benefits. So a benefits cut in the future is more likely to happen than a big benefits bump to account for COLAs that are too small.
With Social Security at risk of the trust fund being depleted, lawmakers are almost assuredly not going to embrace proposals for larger COLAs or catch-up payments. Instead, current and future retirees should watch out for potential changes like raising the full retirement age, which happened in the 1980s when reforms were initiated to help stabilize Social Security's finances.
Sadly, with 2024 shaping up to be a another year of high inflation, retirees may once again lose ground when they get their COLA next year. Seniors should be aware of this very real possibility and make sure they're doing what they can to live within their means and find costs to cut as prices climb.
