Here's How Seniors Have Been Getting Hosed By How We Calculate Social Security

In real terms, the benefits seniors receive are considerably less than what their parents received a few decades ago. It's time we do something about it.

Since its inception, social security has used a cost-of-living adjustment (COLA) called CPI-W each year to calculate how much benefits should grow to keep up with inflation. Their purchasing power would quickly degrade rapidly if such an adjustment were not made. Here's the problem: CPI-W underestimates how much the cost-of-living for seniors increases each year.

CPI-W is meant to represent the price change for all wage earners. It is calculated by weighing different expenditure categories from the BLS's original CPI data. It is approximately 39.2% housing, 18.7% transportation, 15.7% food and beverage, etc. These weights are supposed to represent the average "basket of goods" that wage earners consumers. The BLS calculates the annual cost increase for each category and then weighs them appropriately to determine the final CPI-W statistic.

The problem is that these weights are based on the average "basket of goods" for wage earners, not for seniors. To fix that, the BLS created a new index called CPI-E (E stands for elderly) that estimates the average "basket of goods" that seniors consumer. Here's how they compare (CPI-U is for urban consumers):

As you can see, seniors consume much more health care and housing than normal wage earners. Those just happen to be two areas in which prices have grown much faster than the overall economy. That means that CPI-W understates the actual annual increase in the cost-of-living for seniors. Yet, social security benefits are still calculated using CPI-W.

How bad is this? The BLS found that from December 1982 through December 2007, the average COLA under CPI-W was 3.0% per year while it was 3.3% under CPI-E. That means any senior that started collecting social security at the end of 1982 and continued to do so through 2007 saw the purchasing power of their benefits decrease by more than 7.0%. Another way to put this: If the BLS had used CPI-E initially instead of CPI-W, that senior's benefits would have been almost 16% higher by the end of 2007. That's a big difference.

For decades now, real social security benefits have been slowly declining. Seniors are being systematically screwed over by a faulty COLA calculation.

Fortunately, increasing Social Security benefits has gained greater traction among Democrats recently with Senator Tom Harkin (D-IA) introducing legislation to raise benefits, Senator Elizabeth Warren (D-MA) giving a fiery speech about it this week and Paul Krugman penning an op-ed today. But they are still mis-framing the debate.

Here's Warren said in her floor speech this week:

It's great (and not surprising) that Warren is knowledgeable about CPI-E, but saying that it would increase benefits will simply draw ire from the right. Deficit scolds will scoff at the idea. Instead, she needs to explain how seniors have been getting screwed for years. The current system is unfair and actually reduces their earnings . This isn't about raising or cutting benefits. It's about correcting a gross injustice that has built upon itself year after year for decades. That's a message that would resonate with seniors.

It's one thing to convince them that their benefits should be greater when they are concerned about the national debt. It's another thing to tell them that their real benefits have actually been decreasing. That's the message that Harkin, Warren and Krugman should all be delivering.