Benefits have long failed to keep up with inflation.
Millions of seniors today collect monthly Social Security benefits. And without that income, many retirees would be unable to afford basic expenses like housing, medication, and food.
Now one nice thing about Social Security is that benefits are eligible for a yearly cost-of-living adjustment, or COLA, the purpose of which is to help recipients maintain their buying power as inflation drives the cost of living upward. The problem, though, is that Social Security beneficiaries have actually been steadily losing buying power through the years. And there’s a big reason why.
Social Security COLAs are calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But that index doesn’t accurately reflect the costs — or cost increases — Social Security beneficiaries tend to face.
As such, the non-partisan Senior Citizens League reports that as of 2023, seniors on Social Security had lost a whopping 36% of their buying power since the year 2000. And that was during a year when Social Security benefits got a whopping 8.7% COLA.
That’s why it’s important to have income at your disposal in retirement outside of Social Security. Your savings might do a much better job of outpacing inflation than your Social Security benefits are able to.
COLAs just can’t keep up
The Senior Citizens League reports that between January of 2000 and February of 2023, Social Security COLAs boosted benefits by 78%. But during that same period, the cost of goods and services purchased by typical retirees rose over 141%.
Furthermore, seniors tend to spend a lot of their income on healthcare. And healthcare costs have a tendency to rise from one year to the next. The CPI-W, though, doesn’t reflect that increase in healthcare spending, making it an imperfect measure for calculating COLAs and explaining why those raises really don’t end up giving seniors the buying power they need.
Rely on your own savings instead
It’s clear that Social Security benefits have long struggled to keep up with inflation. But you might manage to invest your savings in a manner that outpaces inflation — both during your working years and in retirement, assuming you stay partially invested in stocks.
That’s why it’s so important to have retirement savings — something a good number of seniors today don’t. And while building a large nest egg can be tricky if you don’t start early on in your career, if you begin funding an IRA or 401(k) consistently when you’re fairly young, you manage to amass a lot of wealth without having to part with an uncomfortably large chunk of your paycheck month after month.
In fact, let’s assume your retirement portfolio is able to generate an average 8% annual return over a 40-year savings window. That’s just below the stock market’s average. If you contribute $400 a month to a retirement plan, you’ll end up with a nest egg worth around $1.24 million.
Just as importantly, you won’t be spending that entire $1.24 million your first year or two of retirement (or at least you shouldn’t). Rather, you’ll be withdrawing a portion of that total. So your remaining retirement plan balance can stay invested to keep up with or even outpace inflation even if your Social Security benefits can’t.
Seniors are often warned not to retire on Social Security alone. And the inability of COLAs to keep up with inflation is one of many reasons why. So if you want to be able to avoid financial worries later in life, do yourself a favor and start funding a retirement account from as young an age as possible.
