Social Security is a key income source for millions of retired seniors. For many, it's their primary or sole source of income. But that's a dangerous financial arrangement for one key reason: Those benefits have been doing a really bad job of keeping up with inflation.
Social Security benefits have lost an almost astounding 30% of their buying power since the year 2000, according to a new report by the Seniors Citizens League. And much of that boils down the fact that Social Security's annual cost-of-living adjustments, or COLAs, have been relatively stingy over the past 10 years. Case in point: This year, seniors saw their benefits go up by just 1.6%.
But that's not the only reason Social Security benefits have been losing buying power; the cost of living for seniors has also been rising. Specifically, the cost of healthcare has been outpacing inflation, and since that's a major expense for seniors, it puts Social Security recipients in a really tight spot -- especially those who don't have access to income outside of those benefits.
Furthermore, because the cost of goods and services -- notably, fuel -- has declined this year, there's a good chance Social Security recipients won't get much of a raise, if any, going into 2021. And that's a tough pill for seniors to swallow.
Of course, that speaks to a bigger issue -- the way COLAs are measured. They're based on fluctuations in the Consumer Price Index for Urban Wage Earners and Clerical Workers -- an index that's hardly reflective of the spending patterns that are specific to seniors, thereby leaving beneficiaries to struggle in the absence of more generous yearly increases.
Making up for lost buying power
It's easy to blame insufficient COLAs for the fact that many seniors on Social Security are struggling, but in reality, those benefits were never designed to sustain recipients in the absence of outside income. Generally speaking, those benefits replace around 40% of the average person's pre-retirement income, but most seniors need roughly twice that amount to live comfortably. And that's why retirement savings are crucial.
Of course, it's too late for today's retirees to go back in time and pad their IRAs and 401(k)s. But workers who still have a paycheck, and expect to have one for years, can take steps to secure their own financial future by saving diligently in a dedicated retirement plan. And it doesn't take a ton of sacrifice to build wealth. Socking away just $200 a month over 40 years results in a savings balance of close to $480,000, assuming that money is invested at an average annual 7% return during that time, which is a few percentage points below the stock market's average.
The fact that Social Security has lost so much buying power in the past 20 years makes one thing clear: Living on those benefits alone is a dangerous proposition. Those with the option to build retirement savings should exercise it, or otherwise risk struggling financially once they realize how badly their COLAs fall short.