Many seniors rely on Social Security to cover the bulk of their living expenses. But that's actually problematic.
For an average wage-earner, Social Security will replace roughly 40% of pre-retirement earnings. Most seniors, meanwhile, are advised to replace their income at a rate of 70% to 80%.
Having that extra income is crucial given the rise in senior healthcare costs through the years. And so those who depend heavily on Social Security often find themselves struggling financially.
Meanwhile, seniors recently got some good news on the Social Security front. Inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) shows that the cost of living rose substantially during 2021's third quarter. The result? Seniors on Social Security are in line for the largest cost-of-living adjustment (COLA) they've seen in decades.
In fact, 2022's COLA will amount to 5.9%. Seeing as how the average beneficiary today collects about $1,559 a month, that means the typical recipient could get a pay raise equal to $92 per month. But there's more to the story than that.
Will Medicare hikes eat into seniors' COLA?
Seniors on Social Security who are also Medicare enrollees pay their Part B premiums directly out of their benefits. As of now, we don't know how much Medicare Part B costs are rising in the coming year. But we can bet on premiums costing more than they do now. And the greater that increase, the less of a raise seniors on Social Security will actually take home.
But that's not the only issue at hand. The whole reason Social Security benefits are getting such a huge boost in 2022 is that the cost of living has risen substantially over the past number of months. Gas is more expensive. Groceries are a small fortune. These are all costs that seniors on a fixed income need to absorb as inflation runs rampant.
So let's get back to that $92 raise. Well, if $10 of it goes to higher Medicare premiums (that's the latest estimate from the Medicare Trustees), another $15 goes toward rising fuel costs, and another $20 goes to higher prices at the supermarket, all of a sudden, that raise is pretty much cut in half.
In fact, this speaks to the need for seniors to have income outside of Social Security. Historically, COLAs have done a poor job of keeping pace with inflation, and now, after years of stingy COLAs, Social Security beneficiaries are operating in catch-up mode.
Seniors with outside income sources, like retirement plan withdrawals, have far more options for keeping up with their expenses and managing their living costs. And so future retirees should do what they can to land in a similar boat.
Generous COLAs on Social Security's part have, for the last several decades, been few and far between. And even when they are more robust, they can easily get eroded. The real way for seniors to attain financial security is through independent savings and other strategies for generating retirement income.