Without taking anything away from Medicare, Social Security is arguably America's most important social program for seniors. The monthly payout to retired workers, which was nearly $1,370 each month, on average, according to the Social Security Administration's July 2017 snapshot, often proves critical in helping seniors meet their financial obligations.
Unfortunately, today's Social Security program is nowhere near the same as that of your parents or grandparents. Once a system that was healthfully funded by working Americans, it is now teetering on disaster. According to the Social Security Board of Trustees' most recent annual report, the Trust is expected to begin paying out more in benefits than it's generating in revenue beginning in 2022. Between 2022 and 2034, some $3 trillion in asset reserves that the program has predominantly built up over the past four decades will be completely wiped out. And when this money disappears, the trustees predict that an across-the-board cut in benefits of up to 23% may be needed to sustain solvency through the year 2091.
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This is a pretty grim forecast for new retirees and working Americans set to retire in the years and decades ahead. But if there is a silver lining, it's that this issue is still nearly two decades away.
Social Security's benefits are rapidly losing purchasing power
A more immediate worry for current and future Social Security recipients is the ongoing erosion of the purchasing power of Social Security benefits.
In a normal year, Social Security beneficiaries receive a "raise," known officially as a cost-of-living adjustment (COLA), which factors in the inflation calculated by the Consumer Price Index for Urban Wage and Clerical Workers, (CPI-W). The CPI-W takes into account a basket of goods and services for households that qualify under the measure and examines whether or not the prices of those goods and services have gone up, as a whole, on a year-over-year basis. The average reading of the third quarter of the previous year serves as the baseline, while the average third-quarter reading of the CPI-W in the current year acts as the comparison. If prices go up, then seniors get a commensurate raise, rounded to the nearest tenth of a percent. If they go down, benefits remain frozen one year to the next.
Sounds pretty simple and straightforward, right? Disappointingly, though, seniors aren't receiving a raise that's commensurate with the year-to-year increases in their actual spending. A study from The Senior Citizens League that was released just a few months ago found that Social Security's purchasing power has fallen by 30% since 2000. In simpler terms, what $100 in Social Security income purchased back in 2000 can now only buy about $70 worth of goods and services.
Three reasons Social Security's purchasing power is falling
The truly bad news is that this trend of purchasing-power erosion is likely to continue for at least the next five to 10 years, regardless of whether Congress acts or sits on its laurels.
The first issue seniors face is that medical-care inflation is taking them for a wild ride. Not counting 2017, since it's not over yet, medical-care inflation has outpaced the COLA beneficiaries have received in 33 of the past 35 years. Be it Medicare Part B medical insurance premiums, or the out-of-pocket expenses associated with long-term care, or Part B (outpatient services) and Part D (prescription medicines) expenses, seniors are having to spend far more on their healthcare than ever before, and Social Security's COLA isn't keeping pace.
The second problem is that housing and rental costs are also rising at a far quicker pace than Social Security's COLA. St. Louis Federal Reserve data on the 20-City Composite Home Price Index from S&P/Case-Shiller finds that since January 2000, the average home price has risen by 97.4%. Comparatively, Social Security benefits have risen by just 43.4% on a nominal basis since 2000, leaving seniors to foot the bill on the difference.
The third issue, which neatly ties in medical and housing inflation, is that the CPI-W isn't necessarily an accurate measure for seniors. The CPI-W measures the spending habits of working Americans, not retirees, so it has a naturally lower emphasis on medical care and housing expenses, while it places more weight on transportation, food, entertainment, education, and apparel expenditures. Since 68.3% of all current Social Security beneficiaries are retired workers, utilizing the CPI-W as the COLA tether is a bit of a headscratcher.
Congress probably can't fix Social Security's eroding-benefits problem
A number of proponents for Social Security reforms, including Democrats in Washington, have called for Social Security to alter how it calculates its COLA. Calls have been made to use the Consumer Price Index for the Elderly (CPI-E) instead of the CPI-W. As the name implies, the CPI-E would only factor in expenditures from households with persons aged 62 or older. The thesis being that the CPI-E would inflate the weighting of medical care and housing expenditures in the annual COLA calculations, resulting in larger annual "raises" for seniors.
If Congress were to run with the idea of the CPI-E, it would almost assuredly lift the annual raises beneficiaries receive compared to the CPI-W. Nevertheless, it would still likely come up short of resolving Social Security's eroding-benefits issue. The big problem with the CPI-E is that it doesn't factor in Medicare Part A expenses, which include skilled long-term care and inpatient services. Part A comprises a large chunk of Medicare's spending, and for seniors it can be a large medical cost. Not factoring this data into the CPI-E almost guarantees that medical care inflation will still run consistently higher than Social Security's annual COLA.
What's more, because the CPI-E would in all likelihood increase payouts to seniors compared to the CPI-W, it could more rapidly deplete Social Security's asset reserves. This isn't to say the CPI-E isn't a better choice than the CPI-W, so much as to point out that it would be unwise to switch to the CPI-E before finding a way to generate additional revenue for Social Security.
It's a gloomy outlook: Social Security payouts just won't be worth the same in five or 10 years, and that's something seniors and future retirees are going to have to come to terms with.
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