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Social Security Benefit Increase for 2020 May Feel Like a Real Cut

(Mark Hulbert, MarketWatch) Your Social Security check will be just 1.6% higher in 2020 than it is this year. Are you disappointed?

Many retirees appear to be. Their disappointment is being fueled by media coverage of the announcement last week from the Social Security Administration. That coverage has largely focused on the 2020’s COLA being lower than the 2.8% COLA in 2019 and the 2.0% in 2018.

To calculate each year’s COLA, the SSA currently uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (known as CPI-W). That measure is different than the more widely-reported Consumer Price Index (formally known as CPI-U, the CPI for “all urban consumers”). Retiree spending rises at a much faster pace than for non-retirees, after all.

How good a job does CPI-W do reflecting retiree inflation?

On the one hand, it has not lagged the better-known CPI-U over the long term. In fact, since June 1975, which is when the Social Security Act designated that the CPI-W be the basis for Social Security COLAs, it has risen at a 0.1% annualized percentage point more than the CPI-U—3.7% instead 3.6%.

On the other hand, it has not kept up with measures of inflation that more specifically reflect the experience of retirees. One such measure is the CPI for the Elderly, or CPI-E, calculated by the Bureau of Labor Statistics, the same outfit that calculates the other versions of the CPI. Over the last four decades, the CPI-E has risen slightly faster than the CPI-W—by an annualized average of 0.2 percentage points.

Significant as that is, its impact shouldn’t be exaggerated. I calculate that, had the CPI-E been used over the last 20 years instead of the CPI-W, the average Social Security monthly benefit would be about $60 more than it is currently—around $1,520 instead of $1,461. 

That’s nothing to sneeze at, of course, but far different than the argument made by some that Social Security benefits have lost 34% of their purchasing power since the turn of the century.

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