Social Security’s Stealth 14% Cut: Inflation Has Quietly Shrunk Your Benefits’ Buying Power Since 2016
Your Social Security benefits come with annual cost-of-living raises, but a flaw buried in the government's inflation formula has been quietly eroding what those benefits can actually buy, and most retirees have no idea how much ground they have already…
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There are many older Americans today who get all of their retirement income from Social Security. But that’s a problem for a couple of reasons.
The first is that Social Security only replaces about 40% of wages for an average earner. As such, retiring on Social Security alone generally means facing a pretty substantial pay cut.
The second issue is that Social Security benefits are not well-protected against inflation, even though they’re supposed to be. In fact, you may be surprised at how much buying power those benefits have shed over the past decades.
Social Security benefits can’t keep up with rising costs
Social Security benefits are eligible for a cost-of-living adjustment, or COLA, every year. Those COLAs are tied to changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which measures price fluctuations for a number of common goods and services.
The problem is that the CPI-W is not particularly reflective of the costs Social Security recipients commonly face. After all, the index focuses on the spending patterns of workers, and Social Security recipients, by nature, tend to be retirees. This means they commonly spend their money differently.
But the expenses seniors tend to spend heavily on, like healthcare, don’t necessarily make up a big part of the CPI-W. And when you take an expense like healthcare, which has risen faster than broad inflation, and consider what little influence it has on Social Security COLAs, it’s easy to see why those annual raises aren’t helping benefits keep up with rising costs in practice.
In fact, due to the mismatch above in the Social Security COLA formula, benefits have lost almost 14% of their purchasing power over the past 10 years, according to research by the nonpartisan Senior Citizens League. And if lawmakers don’t vote to change the COLA formula, seniors on Social Security could continue to lose out.
Try to have other retirement income streams to rely on
Social Security might help you pay some of your bills in retirement, or maybe even most of them. But if you want actual inflation protection, it’s important to have income outside of those monthly benefits.
There are a number of assets that could help you beat inflation in retirement, including:
- Dividend stocks
- Growth stocks
- I bonds, whose interest rates adjust for inflation
- TIPS, or Treasury Inflation-Protected Securities
If you save for retirement and then choose the right investments once your senior years arrive, you may find that you’re able to maintain your buying power even if Social Security’s COLAs continue to fall short.
And remember, there’s no saying you can’t continue to work while you’re getting Social Security.
If you’re nearing retirement and it’s too late to build savings or an investment portfolio, continuing to hold down a job puts extra money in your pocket. And whatever paycheck you collect could help you keep up with rising costs, not to mention give you more room in your budget for discretionary expenses that make retirement more enjoyable on a whole.
Will the COLA formula ever change?
Advocates have been pushing to base Social Security COLAs on a senior-specific index that would likely lead to larger raises. But so far, there’s been no movement. So it’s best to have a plan to supplement those benefits to avoid losing out on buying power in retirement.
Contact [email protected] for any questions or corrections.
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 Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
