Quick Read
Social Security COLAs are eligible for a yearly cost-of-living adjustment.
Those raises don’t tend to keep up with rising healthcare expenses.
A new COLA measure could help solve the problem — if lawmakers can get on board.
A recent study identified one single habit that doubled Americans’ retirement savings and moved retirement from dream, to reality. Read more here.
Read: Data Shows One Habit Doubles American’s Savings And Boosts Retirement
Most Americans drastically underestimate how much they need to retire and overestimate how prepared they are. But data shows that people with one habit have more than double the savings of those who don’t.
Social Security plays a big role in many people’s retirement. Without those benefits, a lot of seniors would not be able to make ends meet.
The good news is that Social Security benefits are eligible for a yearly cost-of-living adjustment, or COLA. The purpose of COLAs is to help ensure that benefits are able to keep up with inflation.
But COLAs have long failed seniors in that regard. And rising healthcare costs are a big reason why.
COLAs are no match for healthcare inflation
The reason Social Security COLAs can’t keep up with soaring healthcare costs boils down to how they’re calculated.
COLAs are based on third quarter changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. That index measures the spending patterns of workers, not seniors.
While workers may spend some of their income on healthcare, Social Security recipients tend to spend a larger share of their benefits on things like deductibles, coinsurance, and premiums. But healthcare costs have also risen faster than broad inflation over the past number of years.
As a result, seniors on Social Security are losing buying power due to the fact that healthcare expenses monopolize so much of their paychecks. Between 2016 and 2026, in fact, Social Security benefits lost an estimated 13.7% of their buying power, according to an analysis by the Senior Citizens League.
There’s a potential solution, but lawmakers may not go for it
The problem with the CPI-W is that it doesn’t fully account for healthcare inflation as it impacts seniors. So a potential solution is to change the COLA calculation and base it off of a senior-specific index — the Consumer Price Index for the Elderly, or CPI-E.
But lawmakers don’t seem too quick to make this change, even though it seems simple in theory. And there are a few reasons why.
First, many consider the CPI-E a less accurate inflation gauge. The Bureau of Labor Statistics developed the CPI-E as a research index rather than an official inflation measure. And because it covers a smaller sample size of people, it has more margin for error.
Also, Social Security doesn’t just pay retirement benefits. It also pays disability and survivor benefits to younger Americans. Basing COLAs only on the spending habits of older people may not be the most equitable way to go about things.
Finally, Social Security is facing a major funding shortfall that could, in the coming years, result in widespread benefit cuts. Advocates of using the CPI-E say it would lead to larger COLAs. But larger COLAs could strain the system even more, making benefit cuts harder to avoid.
All told, there’s no great solution. But it’s important for current and future retirees to budget for healthcare expenses accordingly, and to have some income outside of Social Security to help cover those rising costs.
While Social Security COLAs may not help seniors keep up with rising healthcare costs, a strong investment portfolio could. And that supplemental income could be crucial as Social Security also faces the possibility of broad cuts in less than a decade.
Data Shows One Habit Doubles American’s Savings And Boosts Retirement
Most Americans drastically underestimate how much they need to retire and overestimate how prepared they are. But data shows that people with one habit have more than double the savings of those who don’t.
And no, it’s got nothing to do with increasing your income, savings, clipping coupons, or even cutting back on your lifestyle. It’s much more straightforward (and powerful) than any of that. Frankly, it’s shocking more people don’t adopt the habit given how easy it is.
