Many retirees rely on Social Security to fund their golden years. How much they get each month has traditionally been calculated based on annual cost-of-living adjustments. A newly proposed bill, however, would change the formula

The Democratic lawmakers who have proposed the new law contend that the new calculation method is fairer and more accurate for seniors who count on Social Security. Opponents of the new plan are concerned that it would put undue strain on an already stressed system.

Social Security Was a New Deal

With the nation in the throes of the Great Depression, President Franklin D. Roosevelt unveiled his plan for establishing assistance programs for those in need and for getting the United States back to economic prosperity which he collectively called the New Deal.

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A key component of Roosevelt’s New Deal was the Social Security Act, which the president signed into law on August 14, 1935. The Social Security Act introduced an insurance-like program that was designed to give retirees aged 65 and older a monthly income in retirement.

A Complex Formula

Determining the amount of monthly payout each person will receive from Social Security requires a complex formula that takes into consideration his or her highest years of earnings. That amount, however, is adjusted for inflation. The resulting number is the person’s Average Indexed Monthly Earnings, or AIME.


The AIME number is then used in another complex formula to determine the Primary Insurance Amount, or PIA. That is the amount the retired worker would receive if he or she retired at the typical retirement age, from 65 to 67.

Adjusted for Cost-of-Living Increases

Although this is a simplistic explanation, it offers an overview of how Social Security benefits are determined. Cost-of-Living Adjustments, or COLA, was first used in 1975. By examining the Consumer Price Index for urban wage earners and clerical workers – or CPI-W – from the second quarter of 1974 through the first quarter of 1975, the cost-of-living percentage was set.

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Going forward, COLA was continually based on the CPI-W. The only real change to this came in 1983, when the timeframe used to determine COLA shifted to the third quarter of the prior year through the end of the second quarter of the current year.

The Drawbacks of COLA

For many senior citizens, the way that COLA is currently calculated fails to take into account the factors that impact them the most. Let’s explain. Because COLA uses the consumer price for only urban wage earners and clerical workers, the inflation rate is based on increases in areas of concern to urban wage earners and clerical workers.

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Senior citizens are not impacted by the same areas of inflation. The areas of concern for retirees are focused more on health care and housing than anything else.

Inflation Rate of Seniors to Help Seniors

The newly proposed legislation, called the Boosting Benefits and COLAs for Seniors Act, would change the perimeters of COLA. It would no longer look at the cost-of-living rates for urban wage earners and clerical workers.

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Instead, COLA would be determined by the Consumer Price Index for elderly consumers, or CPI-E. It more closely aligns with the financial factors important to seniors.

“A Lifeline for Older Adults”

The Boosting Benefits and COLAs for Seniors Act was proposed by New York Senator Kirsten Gillibrand, a Democrat, and five of her fellow lawmakers. “Social Security is a lifeline for older adults,” Gillibrand explained.

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“For many, it’s their main source of income,” she continued. “But the benefits are not keeping pace with rising costs, leaving many older Americans struggling to afford the basics – particularly health care.”

Gaps in COLA

The current formula for determining COLA ignores the disproportionate inflation in medical costs that older Americans experience. This gap leaves some retirees struggling to meet their living expenses.

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Gillibrand explained, “The Boosting Benefits and COLAs for Seniors Act would factor the high cost of health care into Social Security benefit calculations and help make sure recipients aren’t forced to choose between paying for their medication and buying other necessities.”

“They Deserve to Retire in Comfort”

Gillibrand noted that the “majority of older adults have already spent a lifetime working, saving and contributing to Social Security.”

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“They deserve to retire in comfort and with funding. We can’t force Americans to choose between housing, financial security and health care.” Gillibrand and her fellow lawmakers believe the new CPI-E switch would be a better way to determine the inflation rate for seniors.

A Monumental Change?

As Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, explained in an interview with Newsweek, “The bill is an attempt to line up COLA payment amounts with the inflated prices many seniors are seeing in virtually every aspect of life right now.”

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He continued, “The Consumer Price Index can tell a broader story about the costs associated with being elderly in America and paint a better picture of just how expensive it has gotten for that age group.”

Just How Would CPI-E Change Monthly Social Security Payments?

Even those who support the passage of the Boosting Benefits and COLAs for Seniors Act are not sure how changing the method of calculation will impact monthly Social Security payments. Beene noted that more research will need to be done to see exactly how the bottom line will change for seniors.

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He added, “It seems like a move in the right direction, but as with anything, data would have to be collected to see just how much of improvement it would be over the current system.”

Would the Boosting Benefits and COLAs for Seniors Act Bankrupt Social Security?

There have been ongoing concerns for several years that Social Security will run out in the next decade or so. The program relies on money being paid into it by working Americans to fund the recipients. As the population ages, there is concern that there will not be enough people paying into the system to support the recipients.

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Many financial experts, in fact, predict that Social Security will run out of money by the year 2033. If the Boosting Benefits and COLAs for Seniors Act is passed, would it speed up the demise of the Social Security system?

Social Security Would Need to Tighten its Belt

According to Michael Ryan, a financial expert who runs a successful website for financial news, “There’s bound to be some opposition from those who think the CPI-W is just fine or who want to see COLAs reduced instead of increased.”

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To keep the Social Security system viable, Ryan believes that legislators will have to examine the program’s current policies and do some belt tightening. “Ultimately,” he said, “it’ll come down to the political dynamics.”

Finding Ways to Offset the Costs

In addition to streamlining administrative and operating costs, Ryan suggests that other ways to supplement Social Security’s coffers will need to be explored. “Higher COLAs would mean higher program costs,” he admitted.

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“So, policymakers would need to find ways to offset that, like raising the payroll tax cap or exploring other revenue sources,” he continued. “It’s a delicate balance.”

The New Act Has Potential

Despite the concerns and challenges facing the Boosting Benefits and COLAs for Seniors Act, many financial experts believe that it has a real shot of being passed into law.

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One reason for this is that elderly Americans traditionally vote in large numbers. In the 2020 election, for example, Pew Research’s reports tell us that nearly 72 percent of senior citizens casted their votes.

The Power of Older Americans

One of these experts is Kevin Thompson, the founder and CEO of 9i Capital Group. He explained, “Health care has outpaced inflation and certain outside forces such as death or disability can force a survivor or loved one into financial ruin.”

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He added, “I believe the program will be a net positive for the elderly population so they can receive the higher of the two systems.”