Retirees generally rely on Social Security to help them pay for necessities. That's because retirement benefits are an important source of income that's guaranteed for life.
They're also supposed to be protected against inflation by periodic Cost of Living Adjustments (COLAs). Sadly, however, while retirees aren't supposed to lose buying power because of these COLAs, the reality is very different.
In fact, new data from the Senior Citizens League shows there's a vast gap between the amount by which retirees' expenses increase and their periodic raises. And the sad truth is, this gap is likely only going to grow unless big (and unlikely) changes are made.
Social Security retirement benefits are rapidly losing value
The buying power of Social Security benefits has been declining for decades, but retirees took an especially big hit last year.
In fact, according to a recent survey conducted by the Senior Citizens League, 63% of retirees indicated their Social Security benefits went up by less than $15 per month in 2020 due to last year's low COLA and the increase in Medicare Part B premiums (which are generally paid out of Social Security checks).
During that same time period, 65% of retirees indicated their monthly household expenses increased by $80 or more -- including 40% of retirees who said their spending went up to $120 or more per month.
You don't need to do a lot of complicated math to figure out that if expenses rise by $80 or more, but seniors get just $15 more in their monthly checks, this is going to pose problems.
Why are retirees losing ground?
The reason that COLAs aren't keeping pace with the cost increases that seniors are experiencing is because of the method used to calculate these periodic raises.
Social Security's annual raise is determined by changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The spending habits of this group don't mirror the actual spending retirees do. And the areas where seniors devote most of their income -- housing and healthcare -- have seen prices rise much faster than inflation.
Although there have been some efforts to change the formula to a different price index designed to more closely mirror spending among the elderly, this is politically difficult. And it would only serve to make Social Security benefits costlier at a time when there are already concerns about its long-term financial viability.
Sadly, with many economists predicting that government stimulus spending will lead to a massive increase in inflation, things could get even worse for seniors in the coming years. And rising inflation also harms retirees by reducing the buying power of their savings, compounding the budgeting difficulties that seniors can experience when the buying power of their benefits falls.
What can retirees do about the shortfall?
Retirees don't have control over inflation, or over how much of a Social Security benefits increase they get. As a result, there are limited options available.
Doing some part-time work to pick up the slack may be an option (just be aware of the possible effect working could have on Social Security benefits if you're a younger retiree). Otherwise, you may need to tighten your budget as your buying power falls, or even consider relocating to an area with a lower cost of living.
For those not yet retired, it's important to pay attention to what's happening to the Social Security benefits of future retirees. You can encourage lawmakers to consider a shift to how Social Security raises are calculated, but you should also plan to increase your retirement savings goals to make sure your savings are adequate to supplement Social Security even as retirement benefits lose ground.
Both current and future retirees should pay close attention to this issue and make sure they have a plan in place to mitigate it, especially as threats of rising inflation grow more pressing.