Every year, Social Security reviews and typically increases both the amount it pays recipients and the wage base it taxes to cover those benefits. The payment increase is supposed to help recipients protect their eroding purchasing power from inflation, while the increase in the tax base is intended to ensure the program can keep paying benefits.
The Social Security increase in 2014 for recipients encompasses a 1.5% hike to payments and an increase to $117,000 from $113,700 in the "taxable maximum" subject to Social Security taxes. The payment increase does fully cover the official inflation rate over the fiscal year ending in September 2013, and the salary base increase subject to taxes does move up with the national average wage index. There's every reason to believe the changes were made accurately, but there's also good reason to believe they're not enough.
Why the Social Security increase in 2014 is not enough
From the perspective of a typical retiree receiving Social Security, that 1.5% raise likely does not fully cover his or her increased expenses. That's because the inflation rate used to calculate Social Security's increases is the Consumer Price Index for Urban Wage Earners and Clerical Workers. In general, retirees face different cost pressures from most working-age people, with health care costs typically taking a greater toll as people age.
In addition to the fact that people generally spend more on health care as they age, the unfortunate reality is that health care costs in general have been rising faster than the overall inflation rate. Add those two facts together, and a typical retiree faces a double-barrel increase in health-care-related costs, one from aging and the other from health care cost inflation. With benefit increases that don't fully cover that large and rising cost, it's likely that retirees dependent on Social Security are losing ground.
From the perspective of an employee who will see more of his or her wages subject to the tax due to the wage base increase, it can seem like more money lost to the program, never to be seen again. Social Security's own trustees claim that the program's Trust Funds will run out of money by 2033, after which payments will likely be slashed to roughly 77% of promised levels.
This means that without a change to the law, people with another 19 years or more before they can collect are on track to never get the full Social Security they may anticipate. Likewise, even current recipients who expect to be alive 19 years from now are also at risk of seeing their payments cut.
What can you do about it?
The reality is that Social Security was never meant to be your sole source of income in retirement. The Social Security Administration claims that the program covers around 40% of the typical retiree's pre-retirement earnings. Unless you can cover your costs of living on that amount -- or even less, once the Trust Funds empty -- you'll need another source of retirement income. That holds true whether the Trust Funds empty or whether the political class manages to find a solution to that long-term crisis.
Your best shot to get that source of retirement income comes through investing. Every little bit you can sock away today is money that can compound on your behalf to be ready when you need it later. The sooner you start, and the more you can save with every paycheck, the better off you'll be in retirement, even if you wind up earning lousy long-run returns.
If you're already in retirement and collecting benefits, unless you can go back to work and add to your Social Security earnings record, there's little you can do to increase your benefit more than that 1.5%. Still, the more you can do to keep your other costs of living down, the more you'll be able to make your money stretch. The further your money stretches, the better your chances will be of covering those unavoidable costs (like health care) that may be rising for you faster than official inflation.
Chuck Saletta is a Motley Fool contributor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.