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No matter how you slice it, Social Security is our nation's most important social program. It's responsible for making payments to almost 63 million people a month, including more than 43 million retired workers, 62% of whom rely on their benefit check to account for at least half of their income. Without this program, elderly poverty rates would likely soar.

But it's also a program that's often criticized for not living up to its full potential. An analysis from The Senior Citizens League found that the purchasing power of a Social Security dollar has declined by a whopping 34% since the year 2000 for senior citizens. In other words, what $100 in Social Security income could once buy in goods and services in 2000 will now only buy $66 worth of those same goods and services.

What's the problem, you ask? Look no further than Social Security's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

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The CPI-W is almost certainly shortchanging Social Security's COLA

The CPI-W has been responsible for measuring the rising and falling cost of a predetermined basket of goods and services for the Social Security program since 1975. It has eight major spending categories and dozens upon dozens of subcategories, each with its own respective weighting in the Index.

Although the CPI-W is updated monthly by the Bureau of Labor Statistics (BLS), not all CPI-W readings are used to calculate Social Security's annual cost-of-living adjustment (COLA). Think of COLA as the "raise" that beneficiaries receive from one year to the next that's designed to take into account the inflation they've faced. Only the average CPI-W reading during the third quarter of the current year and previous year are considered (i.e., July through September). Should the average CPI-W reading rise year over year, then beneficiaries will receive a "raise" commensurate with the percentage increase, rounded to the nearest 0.1%. In the rare instance that deflation occurs and prices fall year over year, benefits remain static from one year to the next.

This probably all seems pretty straightforward, and it is. The COLA calculation problem lies not with the calculation but rather with the subject matter of the CPI-W.

As the name implies, the CPI-W tracks the spending habits of urban and clerical workers. These are often working-age Americans who spend their money very differently from the way senior citizens do -- and seniors comprise a majority of program beneficiaries. As a result, important expenditures for seniors, such as medical care and housing, tend to be underweighted, while less important costs such as education, apparel, transportation, and entertainment get added weighting. This is why the current COLA measure is failing seniors and why both Democrats and Republicans have called for change.

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What would a switch to the CPI-E or Chained CPI-U do to your payout?

With this in mind, the U.S. Government Accountability Office, or GAO, released a 47-page report that examined what would happen if the federal government went away from the CPI-W and instead chose to implement the preferred choice of either the Democrat or Republican parties. Democrats have advocated for the Consumer Price Index for the Elderly (CPI-E), which would focus on expenditures of households with persons aged 62 and up. Meanwhile, Republicans favor the Chained CPI-U, which takes into account substitution bias, or the idea that consumers will trade down to less-expensive but similar items when other goods become too pricey.

For its assessment, the GAO assumed that the CPI-E and Chained CPI-U were implemented in 2003 and kept in place until 2033, providing a 30-year runway for their model. What the GAO noted was a very small change in monthly payouts at first but one that compounded over time.

The CPI-E, which is expected to more accurately measure the costs that seniors aged 62 and up contend with, would expand monthly payouts over time. A hypothetical example offered by the GAO involved an individual who retired in 2003, at age 65, with earnings equal to the National Average Wage Index ($33,256 in 2003). If using the CPI-E, this individual would have seen their now-adjusted benefit rise $36 a year in 2004 ($3 a month), and by about $1,300 annually by 2033. That's a gain of close to $110 a month by 2033, relative to the CPI-W. On a percentage basis, the GAO estimates up to a 4% gain in monthly payouts for lower-income households with the CPI-E over 30 years and just a 1% gain for higher-income households.

The same hypothetical example was then applied using the Chained CPI-U, which is expected to decrease payouts over time. Using the same hypothetical individual, the GAO estimates a $12 annual reduction ($1 month) in 2004. However, by 2033, this individual's annual benefit would decrease by about $2,000 (more than $165 a month) relative to the CPI-W. For lower-income households, the Chained CPI-U is estimated to reduce monthly payouts by 6% over 30 years, with higher-income individuals seeing a 1% decrease.

Image source: Getty Images.

There are caveats, too

Based on the models above, switching to the CPI-E sure looks like a no-brainer way to expand benefits and more accurately measure the inflation that senior citizens are facing. It would be particularly useful for lower-income beneficiaries who are receiving a payout for a long period of time. But if only it were that easy.

You see, the GAO analysis also examined some of the challenges that would arise by moving away from the CPI-W. For instance, the BLS has long considered the CPI-E an "experimental index." There would be significant costs to improve the methodology to produce the CPI-E. Further, BLS estimates from 2017 indicate that switching to the CPI-E would cost an additional $110 million per year. That may sound like a drop in the bucket compared to the $952.5 billion Social Security paid out in 2017, but it adds up over time.

As for the Chained CPI-U, it's based on preliminary data that could be subject to change for up to one year after being initially calculated. This means the possibility of substantial revisions up or down in the future and the need for the program to deal with these changes.

To boot, although it wasn't mentioned in the GAO report, any changes to Social Security are going to require 60 votes of support in the Senate. Given that neither party has held a supermajority in the Senate in 40 years, any changes to Social Security's inflation measure would require bipartisan support. Unfortunately, Democrats and Republicans couldn't possibly be further apart on their replacement choice for the CPI-W, making reform highly unlikely.

Clearly, there's a problem with the CPI-W. How it'll be dealt with remains a mystery.

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