Seniors Have Faced a Stealth 13.7% Social Security Cut — They Just Don’t Know It
Your Social Security checks keep going up every year, so why does it feel like you have less money than ever? The answer involves a flaw in how those annual raises are calculated that affects every retiree collecting benefits today.
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If you’ve been collecting Social Security for several years, you may have noticed that your monthly benefit has increased thanks to the program’s annual cost-of-living adjustments (COLAs).
On paper, those raises look like protection against inflation. In reality, they haven’t always kept pace with the expenses many retirees actually face.
Social Security recipients have been steadily losing buying power
The whole purpose of COLAs is to help ensure that Social Security benefits can keep up with rising costs. But a recent study by The Senior Citizens League, an advocacy group, found that Social Security benefits have lost 13.7% of their buying power since 2016.
The reason is simple. COLAs have generally failed to keep up with the real-world cost of goods and services that matter most to older Americans because they’re based on an index that measures the spending pattern of working folks, not retirees.
Social Security COLAs are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But the CPI-W does not represent retiree spending.
The crux of the issue is that inflation doesn’t affect everyone equally. Retirees often spend a larger share of their budgets on healthcare than working Americans, who tend to be younger across the board. But healthcare costs have outpaced broad inflation in recent years.
That’s not something that’s reflected in the CPI-W. But it does explain why Social Security benefits have lost out on so much buying power despite increasing through the years.
That’s why seniors have faced a “stealth” reduction. Your Social Security checks today may be larger than they were five or 10 years ago. But if those benefits don’t make it possible to actually keep up with rising costs, then they’re probably not doing you as much good as they could.
You can’t control COLAs, but you can boost your retirement income in other ways
Advocates have been pushing for a change to the Social Security COLA formula so that those annual raises are more reflective of the costs retirees face. But so far, Congress has yet to stray from the current CPI-W model.
While that’s not something you can control, there are steps you can take to reduce the impact of benefits that aren’t keeping up with your expenses.
One option is to lean on your retirement savings strategically. If you’ve built assets in an IRA, 401(k), or taxable investment account, those funds can help cover the gap between your Social Security income and your actual spending needs.
It also pays to consider earning some extra income if your health and circumstances allow for it. A part-time job or freelance work could help you pay for everyday expenses if you don’t have a lot of savings to fall back on.
Your investment strategy also matters. Keeping too much of your portfolio in cash may feel safe. But over a retirement that could last 20 or 30 years, inflation could steadily erode the value of your assets. Maintaining a diversified portfolio that includes investments with long-term growth potential could help your money grow faster than inflation.
Finally, review your spending regularly. Inflation doesn’t affect every category equally. Identifying opportunities to trim expenses could make it easier to absorb higher costs without disrupting your overall financial plan.
Social Security may be a valuable source of retirement income, but it’s clearly not doing a good enough job of keeping up with inflation. If you feel like your benefits have lost buying power over time, do your best to line up additional income sources so you’re able to stay ahead of rising costs instead of falling behind.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and CNN Underscored.
