This Republican Social Security COLA Change Would Slash Benefits by $117 Per Month
For the past 82 years, the Social Security Board of Trustees has released a lengthy annual report that looks at the inner workings of Social Security and attempts to forecast how financially “healthy” the program will be over the short term (10 years) and long term (75 years). This report takes into account fiscal-policy changes, as well as a multitude of demographic shifts, such as birth rates and net-legal immigration.
Since 1985, every Board of Trustees report has cautioned that Social Security wouldn’t generate enough long-term revenue to sustain its existing payout schedule, inclusive of annual cost-of-living adjustments (COLA). As of the 2022 report, Social Security is staring down a $20.4 trillion (and growing) cash shortfall through 2096.
If nothing is done to resolve this shortfall, an across-the-board benefit cut of up to 23% to the Old-Age and Survivors Trust Fund — which pays more than 48 million retired workers their monthly benefit — may be necessary by 2034.
Lawmakers on Capitol Hill have offered no shortage of proposals designed to strengthen America’s top retirement program. Unfortunately, our nation’s two political parties have approached these “fixes” from opposite ends of the spectrum, which has resulted in no significant changes or consensus.
But there is one aspect of Social Security where Democrats and Republicans have found common ground: the COLA inflation measure.
Lawmakers agree: The CPI-W has to go as Social Security’s cost-of-living adjustment (COLA) measure
Both of America’s major political parties agree that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) isn’t doing a particularly good job of accounting for the inflation that Social Security’s more than 65 million beneficiaries are dealing with each year.
As I’ve expounded in greater detail, the CPI-W has eight major spending categories and countless subcategories, each of which have their own percentage weightings. This allows for the CPI-W to be expressed as a single number, which can easily be compared to the previous month or year to determine in which direction prices for a large predetermined basket of goods and services have headed.
The CPI-W has been Social Security’s inflationary determinant since 1975, and on paper, it sounds like it would be the perfect measure for the annual cost-of-living adjustment. But this has proven far from the case.
The CPI-W tracks the spending habits of “urban wage earners and clerical workers.” These are often working-age Americans who spend their money differently than seniors, who make up the bulk of Social Security benefit recipients. Ultimately, key expenditures for seniors, such as housing and medical care, are being underweighted by the CPI-W calculation. According to a study by The Senior Citizens League, the purchasing power of Social Security income has fallen 40% since the century began.
This Republican proposal could reduce Social Security checks by $1,400/year
One of the core proposals touted by Republican lawmakers in Washington, D.C. to strengthen Social Security and fix the CPI-W’s shortcomings is to switch the program’s COLA tether to what’s known as the Chained Consumer Price Index. The key difference with the Chained CPI is that it takes substitution bias into account.
In simple terms, substitution bias describes a situation where a consumer trades down to a similar good or service that’s less expensive. This could involve trading down from a brand-name product to a store-owned brand or buying chicken or pork because ground beef prices have soared.
The CPI-W and broad-based Consumer Price Index for All Urban Consumers (CPI-U) — (the CPI-U is the key inflation rate determinant economists look at each month) — are adjusted every two years to account for substitution bias. Meanwhile, the Chained CPI is adjusted for it on a monthly basis.
Substitution bias is very much a real-world consumer behavior. But if the Chained CPI were to become Social Security’s annual COLA measure, it would result in lower “raises.”
According to the Office of the Chief Actuary of the Social Security Administration, using the Chained CPI in place of the CPI-W would lower annual cost-of-living adjustments by approximately 0.3%. After 30 years, a Social Security beneficiary would see their payout reduced by $1,400 per year, or $117 per month, compared to what it would have been had the CPI-W stayed in place.
The CPI-W is likely to remain Social Security’s COLA measure
On the flip side, Democrats also have a proposal to replace the CPI-W. Their solution is to swap out the CPI-W for the Consumer Price Index for the Elderly, or CPI-E.
As its full name implies, the CPI-E would track the spending habits of senior citizens, rather than “urban wage earners and clerical workers.” The Office of the Chief Actuary estimates that utilizing the CPI-E in place of the CPI-W would increase the annual cost-of-living adjustment by an average of 0.2%.
Although one solution probably sounds a lot more palatable than the other (a 0.3% annual reduction in COLA, compared to a 0.2% annual increase), the comparison between these two proposals isn’t as cut-and-dried as you might think. For example, don’t forget about Social Security’s more than $20 trillion long-term cash shortfall.
In 2017, the Office of the Chief Actuary estimated that switching away from the CPI-W to the Chained CPI would reduce the then-estimated long-term cash shortfall by 21%. Comparatively, switching to the CPI-E from the CPI-W increased the long-term cash shortfall by 14%.
Something else to consider is that when Social Security began paying benefits on Jan. 1, 1940, the average life expectancy in the U.S. was about 63 years. As of 2021, average life expectancy in the U.S. was 76.1 years, per the Centers for Disease Control and Prevention. Social Security was never designed to be leaned on by retirees for multiple decades — but that’s become a relatively common occurrence as time has passed.
The point is that cost reductions are likely to be a key puzzle piece to shoring up Social Security over the long run, and the Chained CPI may, at some point, be part of those plans. But for the time being, with Republicans and Democrats ideologically miles apart on how best to tackle Social Security’s problems, the CPI-W is likely to remain Social Security’s inflationary tether. That means a high likelihood of Social Security income continuing to lose purchasing power over time.
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