Because any potential cost-of-living adjustment must be baked into benefits at the start of the new year, beneficiaries receive raises after they’ve already experienced higher prices. The COLA is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (called the C.P.I.-W): Social Security takes the average inflation reading from July, August and September of the current year and compares that with the same period from a year earlier. Any increase results in a pay bump.
There has long been a debate about whether the C.P.I.-W index is the most accurate gauge to calculate Social Security adjustments because it tracks a basket of goods and services purchased by working people, not retirees. Retired individuals tend to spend more of their income on housing and health care, which may be better reflected by another experimental measure, the Consumer Price Index for the Elderly, or C.P.I.-E., which tracks people 62 and older.
“If that was the law today, the COLA in 2024 would be higher,” said Ms. Johnson of the Senior Citizens League. She said the COLA adjustment would be about one percentage point higher than the raise announced on Thursday. The C.P.I.-E doesn’t always lead to a higher inflation adjustment, however, and differences between the two indexes have narrowed in recent years.
And some experts say tinkering with the inflation mechanism has become a less significant issue in the face of Social Security’s looming financing shortfall, which, if left unaddressed, would lead to significant benefit cuts across the board. The trust fund that pays retiree benefits, which is paid for primarily through payroll taxes, will be depleted in 2033, at which time the program could fund only 77 percent of total scheduled benefits.
The payroll tax is split between employers and employees, who each paid 6.2 percent of wages in 2023, up to a taxable maximum income of $160,200. Next year, up to $168,600 of earnings will be subject to these taxes. The only way to close the funding gap is to raise these taxes — or have them cover more earnings — or to shave benefits, all of which require congressional approval.
“The Social Security Administration puts out this book that has hundreds of ways to raise revenue and hundreds of ways to cut benefits,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “It is not an intellectual exercise. It is a political exercise. And I don’t think Congress wants to see a cut of benefits of 23 percent across the board.”
Source: | This article originally belongs to Nytimes.com
