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Every year, millions of Social Security recipients wait to see whether their benefit checks will see a modest increase to account for changes in the cost of living. Yet with retirees bracing for what's increasingly likely to be no raise at all for Social Security checks in 2016, lawmakers are looking at ways to try to get more money to seniors. In particular, one proposal to use a different measure of the cost of living has grown in popularity lately, and even though its impact would be minimal at first, over time it could add up to a lot more money for current and future benefits.
The problem with Social Security right nowThe main issue that Social Security participants face now is that each year's cost of living increases are based on changes in the Consumer Price Index. In late 2014, the measure of consumer prices that the Social Security Administration uses fell sharply, as plunging gasoline prices and other deflationary pressures sent the index down 2.5% between September 2014 and January 2015.
Since then, inflation has picked up somewhat. Yet even with a rise of nearly a full percentage point over the two-month period in May and June, the current CPI-W figure for July was still well below last year's level. Unless substantial increases occur in August and September -- which along with July provides the three-month average against which the SSA will calculate any cost-of-living adjustment for Social Security payments for next year -- recipients are likely to see their checks stay the same for 2016.
Even in past years, Social Security recipients haven't gotten much relief lately. Benefits rose just 1.7% in 2015, with similarly small increases of 1.5% in 2014 and 1.7% in 2013. In both 2010 and 2011, recipients got no raise in their benefits at all.
One proposed solutionIn response, some lawmakers have pointed to the CPI-W figure as being inappropriate for measuring inflation for Social Security cost-of-living adjustment purposes. Instead, an index called CPI-E could replace the current inflation measure, with the goal of the new index being to reflect the costs that elderly Americans pay.
The argument in favor of replacing the CPI measures is that if the purpose of Social Security cost-of-living adjustments is to reflect the actual costs that recipients bear, the CPI-W doesn't do as good a job of reflecting those costs. A recent Congressional Research Service memorandum found that replacing the index would lead to cost-of-living increases that would be about 0.2 percentage points higher each year -- or less than $3 based on the average worker's Social Security benefit of $1,336 per month.
Adding up to real moneyThe key to the proposal, though, is that those increases would be cumulative over time. So while checks might only be $3 higher next year if the proposal were adopted, they'd be closer to $6 higher in 2017, $9 higher in 2018, and so on. Over time, that would add up to substantial extra payments to seniors -- and substantial extra costs for the Social Security program.
In addition, some lawmakers want to make such measures retroactive. The Seniors Deserve a Raise Act that Florida Rep. Alan Grayson expects to file soon would give everyone a raise that would account for 40 years of shortfalls in comparing the CPI-E to the CPI-W. Such a change would front-load huge increases to benefits and have a dramatic impact on the sustainability of the Social Security system without offsetting increases in revenue.
Obviously, paying retirees $36 more in annual Social Security payments isn't going to make a huge difference in their ability to make ends meet. Yet the bigger question is whether retirees deserve a cost of living adjustment that matches up with their true expenses. At least in that limited way, adopting a measure like the CPI-E index would arguably match up better with price changes -- even if it wouldn't do much to address immediate concerns that many retirees have about their financial stability.
The article Social Security: Could $3 More Per Month Really Solve Retirees' Problems? originally appeared on Fool.com.
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