The increased inflation during the pandemic has led to price hikes affecting everything from utilities to food to rental costs. Rising inflation results in higher costs of goods and services, which means the cost of living has increased. But what does this mean for Social Security payments, and are those payments enough to account for the increased costs?
To compensate for the increased cost of living, cost-of-living adjustments (COLAs) are made to Social Security to ensure the payments keep pace with inflation rates. These annual COLAs help to maintain the value of Social Security payments, but they can fall short.
“The COLA index used for Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical workers, calculated by the U.S. Bureau of Labor Statistics (BLS),” explains Doug Carey, Chartered Financial Analyst with WealthTrace. “The BLS starts by selecting a sample of goods and services that represent the typical consumption patterns of urban wage earners and clerical workers.
“Over the past 10 years, the COLA index has not kept up with the general inflation rate if we use the Consumer Price Index (CPI),” says Carey. “It has averaged about 0.5% less than the CPI per year.”
The Senior Citizens League’s research reveals that, since 2000, Social Security benefits have lost over 30% of their purchasing power, largely due to inadequate COLAs paired with increasing health care costs. “We estimate that a senior who filed for Social Security with average benefits over 30 years ago would have received nearly $14,000 more in retirement if the Consumer Price Index for the Elderly had been used,” The Senior Citizens League explains.
The effect of inflation, and the fact that Social Security increases aren’t keeping up, is reflected in Census Bureau data. According to that data, poverty increased in Americans age 65 and older from 8.9% in 2020 to 10.3% in 2021. That increase means that 1 million more older adults rely on limited resources. In contrast, during that same time period, child poverty dropped by 4.5 percentage points to 5.2%, a record low. Older adults were the only age segment to experience a poverty increase during that time, indicating that programs to help support older adults, including Social Security and Medicare, are falling short.
According to the Social Security Administration, “Social Security was created to promote the economic security of the nation’s people.” The program currently offers benefits to 1 in 5 Americans. More than 65 million beneficiaries, including more than 51 million retired workers and dependents, currently receive program benefits.
Social Security has long been touted as an anti-poverty program and a resource to support Americans not only who are retired, but also who have qualifying disabilities. But Carey cautions that those who are in their thirties today shouldn’t plan on getting the full, promised amount once they reach retirement age. “Beginning in the year 2034, the Social Security administration is projected to deplete its surplus reserves, leaving it with the ability to cover only a portion of retirees’ full benefits, estimated at 77%. This means that everybody’s Social Security payments and promised payments would have to be reduced by 23% unless Congress finds a way to fund Social Security and bring it back up to a surplus,” he explains.
With the stability of Social Security benefits in question, and the benefit rates not keeping pace with inflation, it’s important to plan ahead for retirement. Saving for retirement early can help to maximize savings, and meeting an employer’s retirement contribution match offer can also help to boost retirement funds. Experts recommend saving 10% to 15% of pretax income for retirement.
When it comes to utilizing Social Security benefits, it’s important to avoid some common mistakes. Carey explains that claiming Social Security benefits too early can reduce your monthly payments. “Claiming Social Security benefits at age 62, the earliest possible age, results in reduced monthly payments compared to waiting until the full retirement age or beyond. Benefits are reduced by approximately 8% per year that they are taken early. So, a person who takes Social Security at age 62 will see a reduced monthly payment of nearly 40% compared to taking it at their full retirement age of 67,” he explains.
Carey also highlights the importance of Social Security spousal benefits. “Married couples have the option to claim spousal benefits based on their spouse’s earnings record. In general, a spouse can take the greater of his or her Social Security or half of their spouse’s. Those who don’t understand this can be leaving a lot of money on the table,” says Carey.
Given the uncertainty of Social Security and the fact that its payments aren’t keeping up with inflation rates, it’s important to think of it as more of a supplement or support to retirement, than a sole source of retirement income. Planning for retirement early on can help to ensure a more comfortable and stable income, whether or not Social Security payments ultimately contribute to those funds.
Paige Cerulli Paige Cerulli is a freelance content writer and journalist who specializes in personal finance topics. She graduated from Westfield State University and brings more than a decade of professional writing experience to the ConsumerCoverage team. Paige’s work has appeared in outlets including USA Today, Business Insider, and more.