CNBC reports that the latest estimate for the cost-of-living adjustment for Social Security benefit coming in 2022 is 6.1%. That would be among the largest COLAs paid by the program since the feature was added back in 1975.
There are three things to understand about the COLA. First, it is very expensive. Second, it is vital. Third, little within Social Security threatens the long-term stability of the program like these increases automatically generated every year.
There are a number of misconceptions about this feature of Social Security. Keep in mind, the increase in benefits is not a raise. It is an adjustment to keep the buying power of beneficiaries constant over their lifetime.
The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) which increased 6.1 percent over the last 12 months according to the Bureau of Labor Statistics (“BLS”). The increase of the index was primarily driven by higher food and energy prices.
The feature is an important support because beneficiaries tend to rely more on Social Security as they age. For someone who is 67, the COLA implies a few pennies per dollar. By the time that someone turned 90 in 2020, it represents about half of their check – and that is in a period of historically low inflation.
|268.9/253.4 = 6.1%
While vital, the cost to the program is enormous. To illustrate, if we reduce the COLA by less than half, the overall solvency of the program improves by more than half. On the other hand, without that expense, those most in need would get checks on average about half the size that they need.
In contrast to the opinion of pundits and policy makers, these adjustments are not stingy. The image of Scrooge passing out the increases generally stems from coverage given to research from the Senior Center League, a senior’s advocacy group, which claims that seniors have lost 30% of their buying power over the last 2 decades.
If you feel cheated by the COLA, this is the sound bite for you. The statistic has not changed over the last 7 years, having been reported in 2014, and continuing to hold. If I doubt that persistence of that trend, it means that CPI-W misstated the change in prices experienced by seniors about 3% every year for 14 years. Thereafter, it has miraculously transformed into a perfect mirror of costs experienced by those collecting benefits.
The CPI-W is based on data from urban areas across the country based on thousands of providers such as department stores, supermarkets, hospitals, etc. It is a serious academic undertaking. The SCL-index measures at times the change in prices for one person in a specific city with a lone provider. As far as I can tell, it is data intended for and embraced by the true believer.
Beyond the vitality of the feature and its cost, you need to understand that the COLA opens a door to insolvency with very little warning. With the COLA, expense of the program grows by inflation or CPI, whereas revenue grows by wage growth. This works well when paychecks are increasing more rapidly than prices. It doesn’t work well when the economy produces high inflation and sluggish wage growth.
In fact, that combination tends to make the program unravel without warning. Back in 1978, the program had a reserve in the Trust Fund large enough that it could pay scheduled benefits for 50 years. President Carter said at the time, “Now this legislation will guarantee that from 1980 to the year 2030, the social security funds will be sound.” Less than 5 years later, the program was within months of reducing benefits because the reserve was essentially gone despite the increase in revenue generated by Boomers just entering the workforce.
Like the early 80s, the program faces rising costs because of inflation. Unlike the 80s, the workforce numbers according to BLS have declined in response to the pandemic. These dynamics are not well reflected in the current projection from the Trustees. The total cost of benefits is projected to grow by less than 4 percent – including the cost of those newly claiming benefits. The estimates of the revenue are based on a growing workforce, one where total employment will greatly exceed pre-pandemic numbers.
Combined, next Trustees Report is apt to change a lot. It will reflect declining interest rates, lower fertility, and rising inflation expectations for years to come.
Change is not something that most voters have seen in a while. For more than a decade, the Trust Fund has been projected to last into the mid 2030s. Voters find that so comforting that we didn’t ask the Presidential candidates a single question about their plans for Social Security. They seem to accept the forecast as a guarantee rather than a stern warning about what might happen even in a good economy.
That new forecast is expected to be released soon. It is time to start asking questions, and telling your family and friends to ask them as well.