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“Everyone” knows that Social Security was never intended as the sole source of retirement income or even the majority of income – but apparently not everyone knows it if you believe the rhetoric.
Many people claim that the COLA in inadequate, even unfair, some rage that what they receive from Social Security is not what they were promised or what they paid for.
Truth is that it is what was promised and we did not pay for our benefits, we paid a tax to fund a pool of money, a notational government trust fund. If people had paid for their benefits, the incoming tax revenue would be sufficient to sustain full accrued benefits – it isn’t as we know.
To correct the perceived COLA shortfall based on use of the CPI-W, many people suggest using the (experimental) CPI-E which better reflects spending by those over age 62. I read that the CPI-E may be higher, but can also be lower. I did some research and ran some numbers. Here are the estimates.
CPI-E is designed around households age 62+ and historically rises about 0.2 percentage points faster per year on average.
If Social Security COLAs had used CPI-E instead of CPI-W since 2010:
So over time, CPI-E compounds into a modest difference. In the estimate that is $45 per month after sixteen years. Using today’s average FRA benefit the dollars would all be higher. No doubt it helps, but not a significant change, especially when Medicare premium increases will likely continue to outpace inflation in the future.
Changing the COLA calculation accelerates the trust depletion as well. Using CPI-E increases the funding gap by 12% according the Committee for a Responsible Federal Budget Social Security Reform estimator.
There is a clear lesson for anyone who hopes to retire one day. Live your life, use your money, in a way that enables you to create a reasonable (to your lifestyle) income to supplement Social Security. Sounds simple, but for many people it isn’t, not because of income, but priorities and financial discipline.
In your last paragraph, Richard, you apparently make an assumption about the financial literacy on the part of a lot of people. You seem to assume that they know, or should know, how to determine what income they need to supplement their social security payments.
I know many people, some of whom are college educated, who have no idea how to figure out when to claim social security, let alone how much additional money they will need to finance a particular lifestyle. They are clueless. Meaning, for some, it’s an information deficit – not necessarily one of priorities and financial discipline (though I suspect that misguided priorities and lack of discipline are along for the ride).
We can say it’s their responsibility, it’s their problem to figure this out. And that’s true. But it’s also society’s problem. This country does little to prepare people for even the most rudimentary financial planning.
Do you really think it is all that complicated to transition from working and spending to retired and spending?
If a person had an income of $80,000 and a lifestyle accordingly, there are two basic questions. Do I want the same lifestyle and what, if any, major declines in spending will occur immediately upon retirement. Perhaps a mortgage, saving a significant percentage that goes away. You have a good estimate of income needed to start.
You can always get a SS estimate and now you have a rough idea of the income you must be able to generate.
I agree the investing and generating a retirement income stream is more difficult, but there is plenty of help out there. Being clueless is not justification in my book, neither is avoiding the effort not to be clueless.
I go back to my days in employee benefits when we made information readily available to help employees make health benefit and retirement decisions, including face to face seminars.
The biggest challenge was always just to get people to pay attention – when it was for their own benefit.
I get a laugh at social media videos where seniors rant about struggling and how SS betrayed them as it isn’t enough. They claim loudly “I did everything right for forty years, I paid my SS taxes and now I can’t pay my bills”
The thing is, they did not do everything right.
There is one principle that even Buffet pushes. You save and invest first and your lifestyle, your budget, spending always come after. And you increase your saving rate with each increase in income or financial windfall. That works for all but the lowest income levels.
I’m afraid this article went over my head, Dick. I am not at all familiar with the acronyms CPI-W and CPI-E. Definitions and brief explanations would have helped.
The CPI-W is the consumer price index for urban wage earners. The CPI-E is consumer prices oriented toward items more likely related to spending by those age 62 and older.
Sorry, I should not have assumed the terms were always known.
FYI The current projected 2027 COLA is 2.8% to 3% to be determined by CPI data for July, August and September 2026.
Richard: good article! You wrote: “changing the COLA calculation accelerates the trust depletion”, and a cap on the COLA might be part of slowing the depletion.
Our state pension COLA’s, effective in July each year, are capped at 2.5% and are based on CPI-W from the prior year. During the 10-year period my wife has received her pension, the average COLA was 1.89% with a low of .52 and high of 2.5. During my 5 years of receiving the pension, the average COLA has been 2.47% with a low of 2.34 and high of 2.5. Our pension plan is in great shape; the annual actuarial report notes: “The current funded status is 99.91%”. So, a lower COLA cap works on a relatively small scale (Nebraska), but would seem to be worth considering on a larger scale. Not that I hope for lesser income, but a slight change now might help avert a larger change later.
I believe a lower cap on the Social Security COLA should be considered as one tactic to slow the depletion.
The thing is a pension and SS are funded differently. The pension sponsor funds as needed to keep up the required funded status whereas SS funding via taxes is independent of the spending and funded status. In years with high COLAs the pension may have to increase funding or hope investments outperform. SS can’t do that. That’s why i have suggested automatically setting the tax rate based on actuarial determined needs each year so there is a connection.
Richard: I agree with much of that, particularly your last sentence. Seems that should already be the case.
Where I differ is that our pensions are partially funded by our employers, partially by mandatory deductions from our pay, and a very small portion, 1-2%, by the State, thus, from taxes. Most of us considered our mandatory deductions to be very much like taxes, and, of course, the portion our employers (school districts) paid was funded primarily through property taxes.