Social Security's COLA Tracks Working Households, Not Retirees. Here's How Much Bigger 2024's Raise Would Have Been.

You've likely heard by now that Social Security's benefit payments will be 3.6% bigger beginning in January than they are now, reflecting the price inflation U.S. consumers have experienced over the past 12 months.

If you're already receiving Social Security retirement benefits, however, this annual cost-of-living adjustment (COLA) might be inadequate. That's because anyone receiving Social Security retirement benefits is considerably older than the average American (who is 39.4 years old, according to the Census Bureau), and therefore has different life expenses than other U.S. residents.

Specifically, while the typical retiree's household spends less on food, housing, and transportation, it also spends measurably more on healthcare despite earning measurably less income. Those little things add up over time to become one pretty big thing.

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Not quite the right number

The Bureau of Labor Statistics calculates several measures of inflation, only one of which ends up being highlighted by the media. That's the annualized change in the BLS's Consumer Price Index for all Urban Consumers, or CPI-U.

Social Security's yearly COLA, however, is actually determined by the Bureau's admittedly similar Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. As of the latest look, this measure is now up 3.6% year over year, prompting the recently announced 3.6% cost-of-living adjustment to Social Security's payments. (The CPI-U data would have resulted in a similar $75 increase in the program's average monthly payment.)

There's a third, rarely discussed inflation barometer that specifically measures older Americans' changing cost of living. That's the Consumer Price Index for the Elderly, or CPI-E, which reflects living costs specifically for those people at or over the age of 62.

Sometimes it's not so different. Basing next year's COLA on this elderly-focused figure would have more or less matched the adjustment retirees will be seeing, for instance.

Other times, it can be markedly different. As finance expert Michael Ryan pointed out to Newsweek early this year, using the CPI-E to determine 2024's Social Security cost-of-living adjustment would have resulted in a 4% raise, rather than the 3.2% that retirees actually received.

That's still not catastrophic. The higher of these figures would have only meant a $62 increase in monthly benefits, compared to the $50 raise that the program beneficiaries actually got. Since any given year's COLA is relative to the size of the prior year's payment, however, the effect of repeated shortfalls can quickly become cumulative.

Advocacy group The Senior Citizens League argues that between 2016 and this year, Social Security's beneficiaries have lost 13.7% of their actual buying power due to the use of inflation numbers that don't reflect retirees' actual living costs. That's not insignificant.

Relatively easy response for most retirees

There are proposed solutions. However, almost all of them require action from Congress, which is in no particular hurry to address such problems.

Therefore, retirees' most meaningful response for the time being is simply extracting more value from the payments they're receiving. This can, of course, mean generating more investment income, but it could also mean something as simple as the use of higher-yielding savings accounts for your idle cash.

It wouldn't take much for the average retiree household to make up for inadequate COLAs. It just requires taking some action.

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