Most Americans worry about cutting Social Security benefits in the future, with nearly 6 out of 10 Americans fearing it will not benefit them.
But while future cuts are a real possibility, many have missed out on the fact that the cuts did, in fact, happen. In fact, the benefit today is about 30% smaller than it was in 2000 – and things will get worse.
Social Security benefits cuts have happened
Most Americans don’t know that Social Security benefits have been effectively cut, not because of any whimsical laws and regulations. Instead, the benefits were devalued due to the way cost of living adjustments (COLA) are calculated.
Cost of living adjustments have been integrated into Social Security to ensure benefits do not lose purchasing power due to inflation. Unfortunately, the process by which this happens doesn’t really guarantee seniors actually see the added benefits they need so their retirement checks remain valid. This is because an increase occurs that uses something called CPI-W to determine how much benefits will increase from year to year.
CPI-W stands for the Consumer Price Index for urban wage earners and clerical workers. The CPI-W has more weight on some items of expenditure than others in determining rising prices. And this can be understood based on the spending patterns of urban wage earners and clericals, as the name suggests.
The problem occurs because seniors don’t spend the way these two demographic groups do. Seniors spend more on housing and health care and less on things like transportation, entertainment and childcare. And the categories in which seniors tend to spend a lot are more likely to face much higher inflation, which is not accurately measured by CPI-W.
As a result of this, research from the Federation of Senior Citizens shows that Social Security benefits have lost about 30% of their purchasing power since 2000. And every year as retirees receive small adjustments to cost of living because the CPI-W does not show much change in price, retirees will lose ground.
Unfortunately, 2021 was one of those years. For a long time, it looks like there won’t be any Social Security benefit increases next year because the COLA relies on annual changes to the CPI-W that occur in the third quarter of the year. When prices drop or stay the same in July, August and September, the COLA will not be present. And with the number of COVID cases skyrocketing and driving down demand for consumer goods in the early summer, it seems likely this year.
Ultimately, however, higher inflation in the second half of the summer means there will eventually be a rally. But retirees will only see their benefits grow 1.3% over the next year. This is the smallest COLA since 2017, with an average senior receiving less than $ 20 per month in Social Security benefits.
This small increase will come at a time when housing prices are at record highs and when medical costs are rising rapidly. And unfortunately, the evidence also shows that changes in consumer spending patterns due to the pandemic affected the accuracy of the consumer price index as a measure of inflation, leading to key data. formula shows that the cost of living increases more slowly than reality.
For both current and future retirees, a small COLA that underestimates rising prices will only work to accelerate the slow and steady decline in Social Security purchasing power. The Social Security cuts have real consequences, as existing retirees may need to tighten their budgets to avoid having to increase retirement account withdrawals or go into debt to maintain them. their standard of living. And future retirees may need to save more into the future to make sure they aren’t overly reliant on lower annual Social Security benefits.