January 23, 2022

Why the massive increase in Social Security in 2022 is still not enough | Smart Change: Personal Finance

Social Security annual COLA is determined based on the consumer price index for urban wage earners and white-collar workers (CPI-W). For many years, CPI-W has offered retirees less compensation than would be necessary to keep up with the price increases they are experiencing because CPI-W does not accurately reflect what they spend their money on.

CPI-W has overweighted certain expenses, such as entertainment costs, and understated things that seniors tend to spend an inordinate amount of their money on, such as health care and housing. This is a natural consequence of the price index being designed to reflect how urban wage earners spend their money, a demographic with different priorities than seniors who have left the job market.

The Senior Citizens League thinks benefits have lost about 30% of their purchasing power since 2000 as a result of using this ill-fitting formula to calculate COLAs. A large increase in 2022 will not reverse the decades of declining benefit value.

That’s especially true, because while the rise in benefits this year seems big, a 5.9% increase in benefits may not be enough to explain how quickly the prices of goods and services are rising.

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