Social Security's Cost-of-Living Adjustment (COLA) Has a Fatal Flaw -- and Seniors Are Paying the Price

For many of the more than 53 million retired workers currently receiving a monthly Social Security benefit, their payout isn't a luxury -- it's a necessity.

Based on 24 annual surveys conducted by national pollster Gallup, between 80% and 90% of retirees rely on their Social Security income, to some varying degree, to make ends meet. For most of these seniors, there are few announcements more anticipated than the annual reveal of Social Security's cost-of-living adjustment (COLA) in mid-October.

While larger monthly checks are likely to put a smile on the faces of most beneficiaries, the unpleasant truth is that Social Security's COLA comes with an inherent fatal flaw -- and it's the very seniors who depend the most on this retirement program who are paying the price.

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What, exactly, is the purpose of Social Security's cost-of-living adjustment?

In its simplest form, Social Security's COLA is the mechanism that helps beneficiaries combat the effects of inflation (rising prices).

Hypothetically, let's assume that a broad basket of goods and services regularly purchased by seniors increases in cost by 3% from one year to the next. If Social Security benefits remained static, program recipients would lose buying power (i.e., they wouldn't be able to purchase the same amount of goods and services). The near-annual cost-of-living adjustment attempts to mirror the effects of inflation and increase benefits.

Before 1975, there wasn't any set formula or schedule for passing along these "raises" to beneficiaries. Instead, special sessions of Congress would, from time to time, increase benefits for program recipients. For instance, beneficiaries went the entirety of the 1940s without a COLA and received the largest-ever raise on record (77%) in 1950.

Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was adopted as Social Security's inflation-measuring yardstick. This index has north of 200 spending categories, each with its own unique weighting. These percentage weightings allow the CPI-W to be whittled down to a single figure at the end of each month, making for easy year-over-year comparisons to determine whether prices are collectively rising (inflation) or falling (deflation).

The reason program recipients have to wait until mid-October to find out whether their Social Security benefit is increasing is that the COLA calculation only involves CPI-W readings spanning the trailing 12 months ended in July, August, and September. When the U.S. Bureau of Labor Statistics publishes the September inflation data in mid-October, the final puzzle piece needed to calculate the COLA for the upcoming year is in hand.

If the average third-quarter CPI-W reading in the current year is higher than the average CPI-W reading from the comparable period of the previous year, inflation has occurred, and monthly benefit checks are set to climb in the upcoming year. The year-over-year percentage increase in the average third-quarter CPI-W, rounded to the nearest tenth of a percent, equates to the cost-of-living adjustment beneficiaries will receive.

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Social Security's COLA calculation has a fatal flaw that's hurting seniors

Compared to the arbitrary method of having special sessions of Congress pass along raises, relying on the CPI-W to calculate Social Security's annual COLA is a vast improvement. Nonetheless, this inflation-measuring yardstick has its own fatal flaw that's undeniably hurting those who rely most on Social Security income.

The inherent flaw in this inflationary index is unearthed when you examine its full name: the Consumer Price Index for Urban Wage Earners and Clerical Workers. Note the emphasis I've placed on the italicized section, because this is where the problem lies.

As of December 2024, 87% of all Social Security beneficiaries (including workers with disabilities, survivors, and retired workers) were aged 62 or older. However, the CPI-W is tasked with tracking the pricing pressures faced by urban wage earners and clerical workers, many of whom are working-age Americans who aren't currently receiving a monthly Social Security check.

Working-age Americans spend their money differently than seniors do. More specifically, retirees spend a notably higher percentage of their monthly budget on shelter and medical care services than working-age individuals. Even though seniors account for 87% of total beneficiaries and the lion's share of the payouts disbursed by the Social Security Administration, the inflationary index that dictates how much benefits will rise from one year to the next is tracking the cost pressures from an entirely different group of Americans.

Without added weighting being placed on the expense categories that matter most to seniors, Social Security's COLA has consistently come up short. According to an analysis from nonpartisan senior advocacy group The Senior Citizens League, the purchasing power of a Social Security dollar has declined by 20% from 2010 to 2024.

The real kick in the pants is that lawmakers from both of America's major political parties agree the CPI-W has a fatal flaw -- they just can't find common ground on how best to fix it.

Amending the Social Security Act would require 60 votes in favor in the U.S. Senate. Since neither Democrats nor Republicans have controlled a supermajority of seats in the upper house of Congress since the late 1970s, any amendments would require bipartisan cooperation, which has been virtually nonexistent (concerning Social Security) for decades.

Democrats in Congress have favored switching from the CPI-W to the Consumer Price Index for the Elderly, or CPI-E. As its name implies, the CPI-E would track the cost pressures faced by households with seniors aged 62 and above.

Meanwhile, Republicans have proposed moving from the CPI-W to the Chained Consumer Price Index (CPI). The Chained CPI factors in the idea of consumer substitution -- i.e., a consumer trading down from a pricier item to a similar one that's less costly.

Until lawmakers find common ground, the CPI-W's inherent fatal flaw is likely to continue chipping away at the buying power of Social Security income.

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