Math Doesn't Add Up for Social Security

Tina Haapala |


By Gary Silverman, CFP®

The “guaranteed income” the vast majority of Americans will (and do) depend on for the vast majority of their income is Social Security. You’d think that Social Security would be the ideal income stream. After all, it will keep up with inflation and it’s got the best guarantee there is. There are some problems with this.

First, Social Security may not keep up with inflation. January 2009 saw the largest cost-of-living adjustment (COLA) to Social Security retirement benefits since the hyper-inflation period of the early ‘80s. And while seniors, according to The Senior Citizens League, welcomed the 5.8 percent increase, it still left retirees $216 behind each month (inflation adjusted) compared to the year 2000. Why the difference?

The difference is the way inflation is measured by Social Security compared to the method used by most of us. Two issues merge to make the government’s inflation indicator a poor fit to seniors.

The first is that the measure used is CPI-W. That’s the Consumer Price Index for Urban Wage Earners and Clerical Workers. Guess what? If you aren’t the average urban/clerical wage earner, the index doesn’t match your spending habits. In other words, this isn’t an index made to mirror the spending habits of our senior citizens.

The other issue is that most of the government inflation indexes, including CPI-W, adjust the inflation numbers due to technological changes. Here’s how it works. Say that a standard television that used to cost $100 now costs $400. You’d think that the $300 difference is added to the index. Not so. This is because they subtract the value of features you get in a television now compared to long ago.

These days you might get features such as a remote control, closed-captioning, and an HD tuner. Since none of those features were in the earlier model, their estimated value is taken off. Hence that TV selling for $400 might be worth only $200 in the index. The other $200 of “improvements” is discarded.

That you can’t buy a TV with all of those features stripped doesn’t matter. Cars get the same treatment due to air bags, anti-lock brakes, etc. In other words, the various consumer price indexes do not measure the rise in what a real person sees in consumer prices. This is bad news to anyone depending on government COLAs to keep up with the cost of living, namely government pensioners and Social Security recipients.

The other problem with Social Security is that it is not guaranteed. An annuity from an insurance company is guaranteed by contract. Same with a pension from a company you worked for. But Social Security can be changed by a vote of Congress.

Thing is, unless Congress does something, the Social Security system will not have enough income of its own to pay out the benefits we are counting on. Given that there are only two solutions—raise taxes or lower benefits—fixing this problem will generate others.


Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing