Social Security benefits have lost 20% of their buying power since 2010, report finds

Social Security benefits are adjusted to protect retirees against inflation, but not enough, according to some experts, advocacy groups and lawmakers.

Social Security benefits have lost 20% of their buying power since 2010, according to a new study from The Senior Citizens League released Thursday. To compensate for this lost value, retirees would need to be paid $4,440 more per year or $370 more per month. In January, the average retiree received a monthly benefit of $1,860. 

Every year, Social Security benefits are adjusted for inflation using what’s called a cost of living adjustment, which is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W. 

But these cost of living adjustments have lagged behind the rate of inflation. For example, the COLA was 5.9% for benefits paid in 2022. But just before benefits took effect in January 2022, the year-over-year inflation rate in December 2021 stood at 7%, the report noted. 

So far this decade, only one COLA has surpassed inflation. And in 2010, 2011 and 2016, no COLAs were applied to benefits received during those years. “Bad misses like those have a compounding effect on payments over time,” said Shannon Benton, executive director of The Senior Citizens League, in an interview with Marketplace. 

The Senior Citizens League devised its own index to figure out how much buying power retirees have really lost. It used CPI data and other publicly available data, then weighted these amounts based on how the Consumer Price Index for the Elderly, or CPI-E, weights its categories. That’s because the CPI-E is more representative of the average senior’s budget compared to the CPI-W, per the report. 

The cost of housing is the biggest pain point for seniors, followed by transportation, food and beverage, and medical costs. Specific products and services that are important to seniors have drastically increased in cost since 2010, like the average used car (a 217% increase) and the iPhone (a 300% increase). While some might think smartphones are a luxury, they’ve become important for everyday tasks, like checking for directions, authenticating your identity if you’re trying to log into an account, and accessing mobile banking. 

How is the Social Security COLA calculated?

There are limitations with the index that the Social Security Administration uses to calculate Social Security benefits. A 2011 paper published in The National Tax Journal found that the CPI-W does not accurately capture how inflation affects retirees. That’s because retirees tend to have higher medical expenses than workers, and their medical spending generally increases as a share of income as they age. Medical costs also generally outpace the prices of other goods. 

Eric Kingson, a professor emeritus of social work at Syracuse University, praises the COLA for offering rising benefits to seniors, but he still thinks there are improvements that can be made, like making these benefits indexed to the CPI-E instead of the CPI-W. The CPI-E weights medical expenses more heavily than the CPI-W and generally grows faster.

However, the CPI-E isn’t always higher. Since the start of the COVID-19 pandemic, the index has actually been trending lower than the CPI-W, said Gopi Shah Goda, a senior fellow at the Stanford Institute for Economic Policy Research, and co-author of the 2011 paper. “Medical care price increases were actually less than those in food/beverages, housing, and transportation over this time period,” Goda said.

That’s why Kingson said Social Security’s COLA should be indexed to whichever one is higher in a given year. In March, Democratic lawmakers introduced a bill called the Boosting Benefits and COLAs for Seniors Act that would ask the Social Security Administration to do just that. 

The time frame the Social Security Administration uses to calculate the COLA is the percentage increase of the CPI-W from the third quarter of the previous year to the third quarter of the current year. That can also fail to fully capture how inflation affects retirees.  

The Social Security Administration announces whether there is a COLA in October, and retirees begin to see any benefit increases in the upcoming January. That means the COLA may lag behind the current rate of inflation, said Laurence Kotlikoff, an economics professor at Boston University.

Let’s say there’s no inflation during the months used to calculate the COLA. Then on January 1, for some reason, inflation increases by 100%, Kotlikoff said. 

“Your benefits are going to be reduced dramatically during the course of the year in real terms and what they could buy,” Kotlikoff said. He he thinks our health care system should be reformed entirely in order to help seniors with their costs. He advocates for a Medicare For All-type system where the government would provide all Americans with vouchers to cover their expected costs.

While Social Security’s COLA has flaws, the bump in pay most years can provide some much-needed financial relief to seniors. 

“Social Security does actually provide some pretty valuable protection against inflation relative to other sources of retirement income,” Goda said.

For example, most pension payments do not keep up with the actual rate of inflation, and might be limited to a 2% or 3% increase if there is a bump. In comparison, Social Security beneficiaries saw a COLA increase of 8.7% in 2023.

How can we protect Social Security? 

Even if Social Security benefits go up, the trust funds used to pay those benefits are projected to be depleted by 2035. 

The Senior Citizens League has a series of recommendations to ensure Social Security’s finances are stabilized and continues protecting retirees. The organization took into account input from more than 1,500 seniors. 

One solution would be to apply Social Security taxes to the investment income of high earners. Social Security could also get rid of its tax limit. The taxable maximum this year is $168,600, which means any amount you earn above that threshold won’t get taxed. So the maximum you can pay into Social Security — whether you make $168,601 or $1 million — is $10,453. 

Seniors also want to see compromise from both major political parties. A majority say there should be a bipartisan commission devoted to finding solutions that will stabilize Social Security and Medicare finances.

“Social Security is something that virtually all political groups agree with. They don’t want it cut. They support the concept. They might want more benefits, but it’s unfortunately one of the few things we have today that binds our country together,” Kingson said. “It’s built on a set of values that are really about decency. That we have an obligation to work hard, to care for our families, our neighbors, ourselves. And if you work hard, you ought to get something back.”