COLA Concerns – Why Some Are Worried About This Year’s Big Benefits Boost

Social Security recipients received their biggest benefits boost in over 40 years with this year’s 8.7% cost-of-living adjustment (COLA). While that might sound like it should be good news for seniors who have struggled with inflation, The Motley Fool warns there is a huge flaw in the system that could end up costing you.

Too Little Too Late

In 1975, an act of Congress led to the Social Security Administration implementing automatic annual COLAs to help secure benefits being eroded by inflation. The problem is, even back then, it was too little too late.

The problem is Social Security COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It focuses on the spending habits of employed workers not retirees, who typically spend much more on healthcare than younger individuals and healthcare costs rise more quickly than other categories tracked by the CPI-W. This means annual COLAs don’t accurately reflect the impact of inflation on retirees.

Another problem is how and when COLAs are calculated. Social Security sets the COLA in October, based on comparing the third quarter CPI-W from year to year. And the COLA does not go into effect until January. This means seniors often incur significantly higher costs for a long time before they get an increase to offset these costs.

A Simple Solution

The Seniors Trust believes Social Security should use the Consumer Price Index for the Elderly, or the CPI-E, instead. That index specifically tracks the spending of households with people aged 62 and older. It places greater value on rising costs of expenses unique to seniors such as housing, healthcare and medicine. This would provide a much fairer cost-of-living adjustment for retirees because it would adjust based on the actual prices seniors are paying.

Changing the COLA calculator is just one of the main tenets of the Social Security Expansion Act. This landmark piece of legislation would also benefit retirees by providing an immediate Social Security benefits boost. It calls for increasing monthly benefits by about $200 on average, which would help put more money in the pockets of deserving retirees.