In an effort to enhance its cost-of-living adjustments (COLAs), the Social Security system may undergo a significant revamp. This potential reform hopes to better align COLAs with inflation, which has outpaced current Social Security adjustments.
In 2024, senior citizens experienced a 3.2% rise in Social Security benefits, the largest in the past decade. However, this was a step down from the 8.7% COLA granted in 2023.
Despite substantial increases in two consecutive years, the rising inflation limited the purchasing power of seniors. This inconsistency in the COLA mechanism has sparked concerns regarding the financial stability of seniors.
To counteract this, experts called for an overhaul of Social Security benefits that would effectively cater to the escalating living costs. For instance, since 2000, the purchasing power of Social Security benefits has decreased by 36%, largely due to the inaccuracy of COLA calculation.
Based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), COLAs do not adequately account for specific costs borne by retirees, such as healthcare, which grows at a rate faster than the CPI-W.
The Senior Citizens League recommends updating the CPI to the CPI-E that considers the expenditure patterns of people aged 62 and above.
Addressing inflation through Social Security reform
Without such reform, the declining purchasing power of Social Security benefits may continue, potentially affecting older adults’ quality of life.
Policy reformation options include adopting the CPI-E, modifying the Social Security formula and increasing payroll tax cap, all of which require legislative approval and are bound by political hurdles.
While using the CPI-E for calculations garners considerable support, including from President Biden, concerns exist over its accuracy due to regional price variations and household consumption differences. Nevertheless, supporters argue that the benefits of the CPI-E outweigh these potential limitations.
Further proposed reforms include an inflation-adjusted rise to the primary insurance amount along with COLAs and introduction of a minimum benefit set at 125% of the poverty level. More changes in wage taxes for Social Security purposes are also under review.
Biden’s proposal calls for those earning above $400,000 to be taxed while exempting earnings falling between the wage cap and the $400,000 mark. Critics voice concern over the possible discouragement of high-earning individuals from increasing their income due to these tax implications.
This proposed shift towards a more equitable distribution of taxes may increase the revenue for the Social Security fund and address its financial challenges. Notably, though, this plan is expected to affect less than 1% of Americans.
While such discussions are ongoing, this proposal is just one in a series of potential solutions proposed to secure the future viability of the Social Security system. Before implementation, though, it requires approval from the Congress.
