Inflation is one of the biggest concerns for most people, and it appears to be getting worse every month. The most recent survey, conducted in March, shows that prices of items and services rose 8.5% year-over-year, which is the largest yearly increase since 1981. Housing costs were responsible for much of the surge, along with gasoline and food expenses.
Unfortunately, this ballooning inflation is terrible news for older individuals. The rapid rise in costs not only reduces the purchasing power of their savings, but it also exposes one key flaw with Social Security’s Cost of Living Adjustments (COLAs).
There’s a major problem with Social Security raises
Social Security COLAs are designed to assist seniors with maintaining their purchasing power as prices rise.
The Consumer Price Index for Clerical Workers and Urban Wage Earners is used to determine whether prices are going up and by how much. This price index covers a wide range of expenses. The COLA for Social Security is determined using changes in the CPI-W. If the CPI-W indicates that costs have risen 2% year over year, retirees would get a 2% raise.
Only certain portions of CPI-W data are used, however. The COLA is calculated based on third quarter average prices from the year before the raise happens. So, the only months that matter when it comes to whether retirees get a benefit increase or not are July, August, and Sept. To be clear, this implies that the raise given to retirees in 2022 was determined by how much prices had increased year over year as measured by July, August, and Sept. of 2021 versus 2020 instances.
The issue is that inflation has increased since then. As a consequence, this year’s retirees have seen their purchasing power decrease significantly. In 2022, retiree benefits were increased by 5.9%. However, costs are currently up 8.5% when compared to the same period last year, which means their compensation increase has fallen far short of keeping up with rising prices.
The fact that the purchasing power of benefits has deteriorated so much this year shows the danger of inflation spiking. Because annual raises are based on previous figures, a rapid price hike might result in significant financial strain, especially because investment savings’ buying power falls when prices rise.
What can retirees do?
The COLA formula is not responsive to rapid inflation, and retirees have no control over the fact that their Social Security increase may be insufficient when prices increase fast after their benefits are already raised up for the year.
However, seniors may modify their spending plans in order to avoid getting into debt or withdrawing too much money from their investment accounts if this happens. The sooner older Americans attempt to cut back on expenses as costs rise, the better their chances of preserving long-term financial stability.
New retirees should also know that COLAs may not prevent retirement benefits from going down in value, so they should ensure that they have enough savings set aside for a decent life even if Social Security isn’t sufficient to cover all of their expenses.