Seniors on Social Security will see much higher checks next year. That's thanks to a 5.9% cost of living adjustment (COLA), which is an increase that occurs in most years to raise benefits when a certain consumer price index shows costs are going up.
The 5.9% benefits increase is the biggest income bump current retirees have seen in decades, so that's good news right? Not necessarily, according to a powerful senior advocates group called the Senior Citizens League.
Experts say Social Security benefits increase won't do much for retirees
According to the Senior Citizens League, seniors have been faced with COLAs that are too low for decades, which has had a cumulative effect that's resulted in a disastrous loss of buying power.
While benefits have gone up by 55% during the past 21 years, housing costs saw close to a 118% jump during the same period while healthcare costs were up 145%. Retirees tend to spend an outsized percentage of their income on these two main expenses, neither of which is accurately accounted for when Cost of Living Adjustments are calculated.
Housing and healthcare expenditures are undercounted because the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the metric used to determine how much COLAs should be. And senior spending habits differ from those of urban wage earners and clerical workers in important ways.
Unfortunately, the large raise in 2022 isn't going to be enough to make up for decades of inadequate COLAs. And, while a 5.9% benefit increase may seem generous to retirees who've never experienced anything close to it, Mary Johnson, a Social Security and Medicare policy analyst for The Senior Citizens League, believes that even this large benefit increase may be inadequate to keep pace with the actual price increases seniors could see next year.
"The buying power of Social Security benefits may continue to erode into 2022," Johnson warned. Her concerns are bolstered by the fact that the Senior Citizens League has received hundreds of emails over just the past month alone from seniors who have indicated record high levels of recent inflation have prevented them from being able to cover their bills.
Sadly, it is some of the oldest seniors most affected by the decades of small COLAs and by the high levels of inflation now. Many have lived their entire retirement with the value of their benefits slowly eroding due to inadequate COLAs, so their retirement savings may be running short. With such high levels of inflation currently, their savings will likely lose even more buying power. One year with a 5.9% raise won't be enough to turn things around.
Retirees can do little about inflation, unfortunately, other than changing their buying habits by looking for less expensive items as prices rise. But they can make sure they are invested in an appropriate mix of different assets so their savings don't lose as much ground as they would if their investments were too conservative. Maintaining a safe withdrawal rate is also crucial to preserving the nest egg necessary to help supplement Social Security as the value of retirement benefits falls.
Retirees should take the Senior Citizens League's warning to heart and not assume their high COLA will actually allow them to maintain the same spending habits without any lifestyle changes. Living on a budget to carefully manage spending during these times of high inflation will be crucial to protecting financial security in their later years.