For retirees, disability survivors, and people with disabilities, Social Security is a vital safety net. Nearly 67 million people, or around 1 in 5, receive Social Security benefits.
According to a survey by the Senior Citizens League, Social Security benefits have lost 36 percent of their purchasing power since 2000. That number is actually an improvement over 2022 when it was 40%. It still means that today’s dollars are worth considerably less than two decades ago.
In other words, for retired workers to regain the same buying power they had at the turn of the millennium, they need an increase of $516 in their Social Security benefits. As a result, retirees would need to receive a higher average beneficiary benefit of $2,343 compared to $1,827 currently. Remember that in 2023, they received a cost-of-living adjustment (COLA) of 8.7 percent, representing the largest increase in four decades.
As inflation and living costs rise, this raises critical questions about how the program will meet future retirees’ needs.
Why Social Security Lost its Buying Power
A lack of cost of living adjustment (COLA) can reduce the buying power of Social Security benefits. As a result of inflation indexing, OASDI benefits are adjusted for inflation. As prices rise, the purchasing power of Social Security benefits decreases.
There are also other problems with Social Security, including:
- Income hasn’t been enough to cover expenses. There hasn’t been enough income to cover the program’s expenses in recent years.
- Trust funds are running dry. When the trust fund runs out, benefits won’t stop, CNBC reports. It is estimated, however, that the fund’s reserves will run out in 2033, preventing full payment of benefits. It is estimated, however, that the fund’s reserves will run out in 2033, preventing full payment of benefits.
- The number of people claiming benefits is rising. Despite this, worker contributions to Social Security via payroll taxes will remain relatively flat.
A major flaw in the system.
Social Security adjusts for rising costs each year with a Cost-of-Living Adjustment (COLA). Using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), this adjustment tracks changes in the prices of everyday items and services. But there’s a catch.
The CPI-W is intended to describe spending habits among working-age adults. As a result, it might not accurately represent what is most important to seniors, such as housing and healthcare. Other things like transportation and clothing, which seniors might use less, might be given more weight in the index.
As a result, the COLA based on the CPI-W might not entirely reflect the real cost increase for seniors. Despite the COLA, they may still struggle to keep up with rising expenses.
Simply put, Social Security benefits are raised to match inflation. However, some say it doesn’t consider what seniors actually buy, so they could be underpaid.
How This Affects Different Groups
This decline in purchasing power does not affect all Social Security recipients equally. It could, however, affect various groups in the following ways:
- Current retirees. Those already receiving benefits are hardest hit, as their fixed income must stretch further to cover the same expenses. As a result, they may be forced to make tough choices, resulting in them cutting back on essentials or dipping into savings.
- Nearing retirement, retirees may need to adjust their retirement plans and possibly work longer to compensate for the reduced purchasing power of their future benefits.
- Younger generations. Younger generations should be aware of this trend and plan early to ensure that they have sufficient income for their retirement.
- Low-income retirees. Inflation is especially detrimental to those whose income is solely derived from Social Security. Due to limited financial resources, they have fewer options in response to rising costs.
- Rural residents. Although it may be cheaper to live in rural areas, access to essential goods and services can be limited and expensive, and rural retirees may face greater challenges as a result.
- People with disabilities. It is common for individuals with disabilities to face additional expenses as a result of their condition. As buying power declines, healthcare, transportation, and other essentials can become even more difficult to afford.
The Potential Consequences
There are several possible consequences of Social Security’s decreasing purchasing power:
- Increased poverty. The loss of benefit value may lead to more retirees and beneficiaries falling into poverty. The result can be food insecurity, housing instability, and difficulty accessing healthcare. The poverty rate for those 65 and older in 2022 was 10.9%, according to the U.S. Census Bureau. So, this shouldn’t be taken lightly.
- Greater reliance on public assistance. The lack of financial support provided by Social Security may force individuals to rely on public assistance programs like Medicaid and SNAP, which can strain government resources.
- Delayed retirement. Already, retirement fears were on the rise. According to an EBRI survey, 33 percent of workers plan to delay retirement in 2023, up from 29 percent in 2022 and 26 percent in 2021. As a result, by delaying retirement and continuing to work, they may negatively affect their health and well-being.
A Better Solution Could Be in the Works
According to senior advocates, Social Security COLAs should not be based on the CPI-W. The CPI-E is a different measure of inflation for the elderly, so they’re pushing lawmakers to use that instead of calculating raises.
It might be beneficial to develop an index that emphasizes the costs that older people are likely to incur and find burdensome, such as healthcare, which is often a considerable expense. Lawmakers may eventually seek to use the CPI-E as a COLA if advocates continue to push it.
What You Can Do
Even though Social Security’s future is uncertain, you can take these steps to prepare:
Start saving early.
Your retirement savings have more time to grow the earlier you start. According to a report by the Milken Institute, an economic think tank, it’s best to start saving for retirement at 25 or younger.
That number has a very simple mathematical explanation. When you start saving for retirement in your early 20s or even younger, you help ensure that your assets grow to at least $1 million by age 65 because of compounding.
Estimate your future benefits.
The Social Security Administration’s online tools can help you estimate your retirement income based on your earnings history.
For many retirees, considering their Social Security retirement benefits is an essential step in deciding when to retire. At age 62, most people are eligible to claim Social Security retirement benefits. Nevertheless, you will receive a higher future monthly retirement benefit if you wait until you turn 70. Sometimes, the amount you’d receive at 70 is almost double what you’d receive at 62.
Develop a retirement plan.
When creating a retirement plan, consider your desired lifestyle, expenses, and the possibility of a shortfall in Social Security benefits.
Diversify your investments.
Retirement income shouldn’t be solely dependent on Social Security. To spread your risks, diversify your investments, such as stocks, bonds, and mutual funds.
Explore alternative retirement savings options.
IRAs, 401(k)s, and other retirement accounts are excellent options for diversifying your retirement savings. In retirement, this can provide a much-needed supplement to your Social Security income.
In particular, you may want to consider annuities.
Annuities’ main purpose is to provide investors with principal protection and guaranteed growth to offset the effects of inflation during uncertain times.
Annuities offer a level of risk management above and beyond traditional retirement products. They also offer a level of flexibility. In addition to protecting your principal, annuities distribute a guaranteed income you cannot outlive.
Ultimately, various investments, including annuities, allow investors to lock in their gains in good market years by moving them from pure equity vehicles to protected investment vehicles.
Stay informed.
Make sure you are up-to-date on developments related to Social Security and advocate for policies designed to ensure its long-term sustainability.
Conclusion
In recent years, the buying power of Social Security benefits has declined significantly, posing a significant challenge for the program and its beneficiaries. Even though there are no simple solutions, understanding the problem and taking proactive steps can help you plan for the future.
It’s important to remember that Social Security is just one piece of the retirement puzzle. With a comprehensive retirement plan, you can maximize your financial security and reach your retirement goals.
FAQs
What does “downgraded by 36%” mean?
Inflation causes Social Security benefits to lose purchasing power. However, inflation erodes the nominal benefit amount’s value, so it buys less over time. The 36% downgrade indicates that Social Security benefits can’t be purchased as much as they could in the past.
Why is this happening?
The primary cause of this problem is inflation. As prices increase faster than Social Security benefits, their purchasing power diminishes. Moreover, demographic changes, such as an aging population, can strain the program.
What does this mean for me?
If Social Security provides a significant portion of your income, this decrease in purchasing power can hurt you. In the future, food, housing, and healthcare may become more expensive.
What can I do?
You can take the following steps:
- Review your budget and adjust spending. To save money, find areas where you can make cuts.
- Explore additional income sources. You can supplement your income by working part-time, saving for retirement, or exploring other options.
- Stay informed. Keep up with the latest Social Security news and updates.
- Advocate for change. Let your elected officials know you are concerned about Social Security’s future.
Are there any proposals to address this issue?
Social Security’s challenges are being discussed, and proposals are being made. Alternative funding sources may include changes to benefit formulas, tax increases, or other forms of funding.
Putting the annual cost-of-living adjustment at a lower level would be one example. It is possible that Social Security could use the chained consumer price index as a measurement for its annual cost-of-living adjustment, which would reduce benefits increases by about 0.3 percentage points a year.
According to the American Academy of Actuaries, that change would cover 13% of the shortfall in 2034. Comparatively, another proposal would increase the annual benefit adjustments by 0.2 percentage points on average if the COLA were based on the consumer price index for the elderly, or CPI-E. According to the report, that change would increase costs by about 8% of the 2034 shortfall.
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