In 2015 Social Security benefits will rise by 1.7 percent per the annual cost of living adjustment (COLA), affecting more than 58 million beneficiaries. According to the Social Security Administration, monthly benefits for the average retired worker will increase from $1,306 to $1,328, while benefits for average retired couple will rise from $2,140 to $2,176.
Also in attempt to keep up with inflation, the SSA is increasing the maximum taxable earnings and earnings test exemptions. The maximum taxable earnings will rise from $117,000 to $118,500, and the earnings limits for retirees under the full retirement age of 66 will increase from $15,480 per year to $15,720 per year. For seniors who turn 66 in 2015, however—but who collect benefits before that birthday – the earnings limit will be $41,880.
2015's COLA is a slight increase from 2014's 1.5 percent but significantly lower than the 3.6 percent COLA in 2012. These fluctuations, which have been commonplace throughout the last 30 years – are due in large part to the oft-criticized way the SSA calculates the COLA each year. “The Social Security law requires annual adjustments based on the CPI, but that only looks at the third quarter of the year: the average for July, August and September,” said Jamie Hopkins, Associate Director of the New York Life Center for Retirement Income. “That might necessarily reflect spikes in prices, and if you look at COLAs from the mid-1980s until now, they all range somewhere between five and a half perfect and zero.”
More controversial is the SSA's use of the CPI-W—the consumer price index for workers—as the basis for the COLA calculation. Critics of the current calculation point out that the CPI-W measures changes in the cost of living for workers, and that it doesn't take into account many of the rising costs seniors disproportionately bear. “Computer prices have fallen, for instance, but for people collecting Social Security, those kinds of prices aren't that important,” said Hopkins. Compared to wage earners, the elderly tend to spend more money on travel, prescription drugs and out-of-pocket medical bills and less on property taxes, fuel and food.
Ultimately, the CPI-W-based COLA may be inadequate in meeting retirees' spending needs. “We've not been keeping up with what the elderly really need in the last couple of years,” said Hopkins. “Over the last five years, they've probably lost about five percent of their spending power.”
Alternative CPI calculations have been put forward, though they've met limited praise in the legislature. One of the most recently proposed measures is the “chained” CPI, which would take into account consumers' changes in purchasing decisions when the price of one good rises faster than substitute goods, such as the substitution of chicken for beef. Another is the CPI-E, an experimental price index that specifically accounts for the goods and services seniors most often buy. According to the Bureau of Labor Statistics, the CPI-E rose 15.9 percent between 1990 and 1995, a period during which the CPI-W only rose 14.1 percent. “I think both of these make more sense than the CPI-W, but I don't see either one of them changing,” said Hopkins.
If current trends continue, retirees will simply have to rely less on Social Security and more on investments and other sources of income – a tall order for a population in which, according to the SSA, 22 percent of retired married couples and 47 percent of single retirees depend on the program for 90 percent or more of their income. “If you're advising clients, you can't do much about increasing benefits; you're stuck with those,” said Hopkins. “You don't always have to save more, but you have to save smarter, and we need to be better at saving through accounts like IRAs and Roth IRAs.”