Experts are pushing for alternative ways to calculate annual Social Security increases, after projections showed that next year’s boost is likely to fall significantly short of the average older adult’s monthly living costs.
The Senior Citizens’ League’s COLA Watch, which tracks projections for the annual cost-of-living adjustment (COLA), forecasts a 3.8% increase in Social Security retiree benefits for 2027. That would give retirees an average of $77 more per month (to $2,103.41) to help cover living costs next year — but it would still fall $597 short of the average older person’s monthly living expenses (around $2700 per month).
The league’s findings have prompted it to urge Congress and the president to “raise benefits so seniors can meet basic cost-of-living standards.” It has also renewed its calls for a different method of calculating the annual cost-of-living adjustment.
But why do advocates believe the current formula falls short, and what alternative do they want the government to use?
How is COLA calculated at the moment?
The cost-of-living adjustment is based on the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners (CPI-W), and determines the new payment for tens of millions of Social Security retirement and disability recipients.
The CPI-W is worked out by tracking the average price changes of a static “market basket” of goods and services such as food, housing costs, clothing, transport and more.
Each autumn, the Social Security Administration (SSA) looks at the average CPI-W across July, August, and September and compares it with the figure from the same period a year earlier.
If the CPI-W has gone up, benefits increase by the same percentage, starting the following January. If the index has remained unchanged or fallen, benefits simply stay the same. Payments never go down.
What is proposed to replace it – and why?
The Senior Citizens’ League wants COLA for retirees to be calculated based on a newer metric called the Consumer Price Index for the Elderly (CPI-E).
Introduced by the U.S. Bureau of Labor Statistics (BLS) in 1987, the CPI-E was an experimental scale designed to measure price changes according to the actual spending habits of older adults.
It uses the same underlying price collection system as the main CPI, but instead calculates the consumer basket to reflect how older Americans actually spend their money, taking a snapshot of retirees’ spending priorities as well as how much they are out of pocket.
“The COLA has been sometimes viewed as inadequate, in that it does not reflect the spending patterns of Social Security beneficiaries,” Rich Johnson, vice president of financial security with the AARP Public Policy Institute, told Yahoo News.
“People 62 and older spend more on housing and medical care, for example, and less on transportation, food and beverages, and apparel,” he added. “Social Security beneficiaries are 62 or older (except for some receiving disability benefits), and are older than most urban wage earners and clerical workers.”
What would the CPI-E mean for retirees’ benefits?
As the CPI-E is based on an older persons’ living costs, it places a higher mathematical “weight” on the categories of spending that experience the most rapid price inflation.
As a result, the CPI-E “generally increases faster” than the CPI-W, Johnson said.
“If the Social Security COLA had been based on the CPI-E instead of the CPI-W, the COLA would have been higher every year during the 40-year period from 1986 to 2025 except for eight years,” the AARP expert said.
While Johnson said the average difference in the COLA over those 40 years “is small—just 0.2 percentage points,” those small annual differences accumulate over time and “could become significant.”
“If a COLA based on the CPI-E had gone into effect in 1986, the 2025 Social Security benefit for someone who began collecting in 1986 would have been 8.1 percent higher than under the actual COLA that occurred in those years,” he added.
So, why hasn’t it been adopted yet?
Although the index dates back nearly 40 years, the CPI-E is still considered to be in early stages of development, meaning it could be less statistically reliable.
“One reason this index has not been adopted is that it is considered experimental,” Johnson said.
The CPI-E also draws its findings from a significantly smaller number of people, using one-third the size used for the CPI-W, which may make it more susceptible to sampling errors.
It also assumes that the working-age people and retirees shop at the same types of stores and live in the same geographic areas, which some fear could skew the results.
The index allocates 49.1% of retirees’ costs to housing compared to 42.7% for workers. As many seniors have paid off their mortgages, the price of housing may in fact play a smaller role in their cost of living, the Congressional Budget Office has argued.
While the jury may be out on how to adjust senior payments, The Senior Citizens’ League has reiterated the need for Social Security payments to catch up to seniors’ spending.
“We’re seeing inflation on the rise when more than half of seniors already can’t afford basic living standards,” Executive Director Shannon Benton of The Senior Citizens’ League Shannon Benton said in June. “Many seniors already have to skip doctors’ appointments due to costs, which costs all of us more in the long run when we swap preventive care for emergency care.
“A 3.8 percent COLA might sound like a lot compared to last year’s 2.8 percent, but it won’t be enough to make up the difference between what seniors bring in and what they need to live with dignity.”
The SSA has been contacted for comment.
