Please ensure Javascript is enabled for purposes of website accessibility

Why Retirees Are Losing Ground on Social Security

By Christy Bieber – May 13, 2021 at 6:34AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You need to prepare for your benefits to provide less buying power.

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. 

Older couple reviewing financial paperwork.

Image source: Getty Images.

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.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.