Many seniors rely on Social Security benefits for a substantial portion of their income in retirement. This is a problem for a few reasons, including the fact that the program is only designed to replace about 40% of pre-retirement income.

The biggest problem for most seniors, though, is that the buying power of Social Security benefits is eroding very quickly. In practical terms, this means your benefits will be worth much less later in your retirement, when you will likely need the money most.  

Money changing hands

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The practical costs of losing purchasing power

A recent report from The Senior Citizens League revealed just how much the value of Social Security benefits has eroded for retirees.

According to the report, since 2000, benefits have lost a full 34% of buying power. This means that for every $100 worth of goods purchased by a Social Security recipient in 2000, that same person can now only buy $66 worth of goods and services.  

This is a big problem with major practical implications.

The Senior Citizens League gave the example of buying home heating oil. In 2000, a homeowner with a 500-gallon oil tank would pay $575 to fill the tank for winter. The average monthly Social Security benefit in 2000 was $844.60, so that senior could have filled the tank and been left with about $270 in monthly benefits. 

But by 2018, the cost to fill a 500-gallon oil tank had risen to around $1,610. That same senior's $844.60 monthly benefit would have become just $1,193.10. The retiree would now need an additional $417 on top of that monthly benefit to fill the same oil tank.

Why are benefits losing buying power?

Social Security benefits are losing buying power for a simple reason: cost-of-living adjustments (COLAs) that are used to determine the raises seniors receive each year don't accurately reflect rising expenses that they face. So, annual benefits increases are too small to maintain seniors' buying power. 

In fact, Social Security benefits have increased just 46% since 2000, while there's been a 96.3% increase in expenses seniors incur. 

The raises seniors receive due to COLAs are too small because adjustments are calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index tracks the rise in prices on the things urban wage earners most often spend money on.

Unfortunately, seniors tend to spend differently than urban wage earners and clerical workers, so many experts believe the CPI-W doesn't accurately reflect seniors' rising costs.

And it's only getting worse, as the things seniors purchase go up in price rapidly. In 2018, for example, Social Security benefits have lost 4% in buying power thanks to big increases in housing and medical expenses. 

When buying power declines because COLAs don't keep pace with rising costs, a senior's standard of living declines the longer the senior is retired. This is an especially serious problem because seniors often become more reliant on Social Security as they get older, their savings dwindle, and they get sicker and need more care. 

Is there anything you can do?

Unfortunately, seniors can't do much about the erosion in buying power caused by COLAs that are too low.

They can lobby their lawmakers to change the way raises are calculated. One common proposal is to change the rules so COLAs are tied to the CPI-E, a pricing index designed to track how costs rise on goods and services most often consumed by the elderly.

Unfortunately, there's no guarantee this will be a successful strategy amid Washington's climate of political dysfunction. 

Instead, you need to take care of yourself by ensuring you don't rely on Social Security to provide too big a share of your income. Save as early as possible and as much as possible to ensure you have other money besides Social Security as a senior.

If you expect you'll need to rely more on Social Security, you can delay benefits to raise the monthly amount you receive. And try to refrain from drawing down savings too early because you may be more reliant on them later in retirement, when the value of your Social Security benefits has substantially eroded. 

Benefits aren't enough

While you'll probably need Social Security to get by as a senior, these benefits simply aren't enough to live on -- especially as buying power is eroding. Start saving today so you'll have other funds.

And if you already depend on Social Security, look for ways to cut living expenses. By preparing, your household won't be faced with such a big financial shock as it becomes harder to cover expenses. 

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