A proposal could potentially increase Social Security benefits for
seniors, giving retirees more money to live on every month. The reintroduced
Social Security 2100 Act proposes to temporarily change how the cost-of-living
adjustment (COLA) would work, possibly resulting in a small benefits boost.
As retirees spend more of their money on growing costs like health care, the idea
of increased benefits could offer some relief. Here’s how the proposal might
work and how it might benefit retirees.
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How the current COLA works, and what the proposal would change
The newly reintroduced Social Security 2100 Act proposes to modify the COLA
calculation from 2027 to 2036 with the goal of ensuring that benefit amounts
more accurately reflect retirees’ spending.
The COLA is designed to ensure that Social Security benefit amounts keep up with
inflation. The current COLA calculation uses Consumer Price Index for Urban Wage
Earners and Clerical Workers (CPI-W) data, which reflects how working households
typically spend their money. However, it doesn’t necessarily reflect the way
that retirees often spend their money and the expenses they face, like
significant health care expenses.
Under the Social Security 2100 Act, CPI-W data would still be used, but data
from the Consumer Price Index for the Elderly (CPI-E) would also be
incorporated. CPI-E data monitors spending of Americans aged 62 and older. The
act proposes referring to both data sets and then using whichever data set
creates a larger COLA in each year.
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Why changing the COLA calculation matters to retirees
Approximately 70 million Americans receive Social Security benefits, and for
many retirees, Social Security is a substantial portion of their monthly income.
Senior industry advocates have repeatedly called for the COLA calculation method
to be updated, since it doesn’t accurately reflect increasing medical costs and
other expenses that seniors often face.
By using both CPI-W and CPI-E data, the proposed bill could make the COLA more
accurate, ensuring it reflects how retirees actually spend their money and
helping benefits keep up with the actual costs associated with retirement. The
CPI-E tends to run about 0.2 percentage points higher than CPI-W data per year,
reflecting the larger percentage of income that older adults tend to spend on
health care.
The potential financial impact of the bill
The bill would likely have a very modest effect in any single year, but its
impact compounds, leading to larger benefit increases over time.
Let’s say that the bill was implemented. If CPI-E data ran 0.2 points higher
than CPI-W data, a retiree with a $1,500 monthly Social Security benefit might
see an increase of about $3 more in the first year than they would have seen if
a COLA was calculated with CPI-W. However, if CPI-E data were used for the
entire 10-year window, the retirees’ cumulative benefits could be about 2%
higher by the end than they would be if CPI-W data were used.
During years when CPI-W data was higher, the COLA could be calculated using
CPI-W data, so the effect of the COLA change could vary from year to year as
inflation fluctuates. Regardless, having both sets of data available as options
could maximize benefits for seniors. The bill’s change to the COLA would be
temporary, and after 10 years, the COLA calculation would revert to the current
form of using only CPI-W data.
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How much could the bill help seniors
The bill may help Social Security benefits keep up with rising costs, and during
times when inflation is steep, it might provide some welcome financial relief as
retirees face increasing health care, energy, and housing costs. If retirees feel
like their benefits aren’t keeping up with their expenses, the changes
implemented by the bill might give their benefits an extra boost.
But keep in mind that the benefits increases aren’t likely to initially be
significant, and the COLAs would be only slightly larger over time. While
retirees might get a bit of financial relief from the higher benefit amounts,
increasing benefits also would mean that Social Security would need more funding
to pay for those benefits. Since Social Security already faces trust fund
insolvency that might result in benefit reductions, lawmakers likely need to
identify a broader solution for the program’s financial challenges before the
bill stands a chance of being voted into law.
Bottom line
The bill has only been referred to committee, and at this time it has limited
Republican support. The greater Social Security conversation currently focuses
on its looming insolvency, so this bill may not have the support it needs to
pass in the near future.
If Social Security benefits are a key part of your retirement plan, it may be a
good idea to revisit your budget to see how you’d fare if benefits were reduced
in the event that Congress doesn’t implement a fix before the trust fund runs
out. Consider speaking with a financial advisor to check
up on your retirement readiness and make sure that you’re prepared in light
of the uncertainty surrounding Social Security.
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