While millions of retirees won't see an increase in their Social Security checks next year, it's not a new phenomenon. Seniors have been feeling pinched for decades, and critics have a culprit: the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W.
The issue is how changes to Social Security benefits are calculated, with the system currently tying increases to the CPI-W. That index tracks the cost of buying typical consumer goods and services, such as food and housing.
But that index is geared for spending by younger consumers and underestimates the type of price inflation experienced by seniors, mainly due to increases in health-care costs, according to The Senior Citizens League, a nonpartisan advocacy group. The past five years have brought cost-of-living increases to Social Security benefits of only 1.4 percent annually, which is less than half the 3 percent average from 2000 to 2010, the group said.
As a result, seniors have lost 22 percent of their buying power since 2000, according to a survey from the group.
The issue for older Americans is that Medicare premiums, which can be a big expense for some retirees, isn't included in the index's calculations. The pain may become even more intense next year, given the combination of flat Social Security benefits and a projected increase in Medicare premiums for the 55 million people on the program.
Some Medicare recipients could see their premiums jump by as much as 50 percent. For Americans who rely on Social Security payments for the bulk of their retirement income, that could prove very painful.
Ironically, next year's flat Social Security payments are to blame for the increase in Medicare premiums. About 60 million people on Social Security won't receive an increase next year, but about 70 percent of Medicare enrollees are protected from premium increases when their Social Security payments don't rise. That means that the other 30 percent of Medicare enrollees will shoulder the burden of Medicare's total price increase.
Some of those Medicare enrollees who will see higher premiums are wealthy retirees, while others are new to the program, according to The New York Times. But even wealthy retirees may find the Medicare price hike hard to bear, given that premiums for some high-income seniors could jump to more than $500 per month.
So what's the solution? Using another cost-of-living index is one way to fix the problem, according to the Senior Citizens League, which advocates a measure called the Consumer Price Index for the Elderly, or the CPI-E. That index tracks spending inflation at two-tenths of a percentage point higher than the CPI-W currently used for Social Security benefits.
"That may seem like an insignificant amount, but over a 25-year retirement, COLAs do compound significantly," the group notes. "We estimate that a senior who retired with average benefits in 1984 would have received nearly $14,000 more through 2014 if the CPI-E had been used."