Do You Belong to the Group of Over 38 Million Elderly Individuals Concerned about Insufficient Retirement Funds? You're Not the Only One Facing This Challenge.
Do You Belong to the Group of Over 38 Million Elderly Individuals Concerned about Insufficient Retirement Funds? You're Not the Only One Facing This Challenge.
Social Security is a significant duty of the United States government. In the previous year, the program distributed approximately $1.5 trillion to 68 million individuals, with 51 million being retirees. Numerous retirees depend on the program as a substantial portion of their income.
Initially conceptualized as one of three retirement income sources alongside employer pensions and personal savings, Social Security's role has expanded as pensions have become scarce for most individuals. Many lower-income earners lack the capability to save in 401(k) plans, rendering them heavily dependent on Social Security benefits. In fact, one out of seven retirees have no other consistent income source.
Many retirees, regardless of the origin of their retirement income, are feeling the strain after years of high inflation. If you're concerned about having sufficient funds for the forthcoming year, you're not the only one. A survey conducted by The Senior Citizen League (TSCL) – an organization advocating for senior citizens – revealed that 62% of senior citizens are apprehensive about not being able to afford basic necessities such as food and utilities in the near future.
So, how did we arrive at this point?
A brief overview of the COLA
Most retirees are aware that their Social Security benefits receive an annual increase. This is the annual cost-of-living adjustment (COLA) implemented by the Social Security Administration (SSA) to protect retirees from inflation. The COLA was once a legislative act, but it's now automated.
Prior to 1975, a legislative act was required to alter SSA's benefits. Consequently, prolonged periods would pass without any increase. When inflation surged aggressively in the early 1970s, it generated sufficient political pressure for legislation. A new law was passed, establishing an annual adjustment known as the COLA.
The COLA is calculated today using the same method introduced in 1975. Each year, the SSA employs an inflation metric known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W); averages the CPI-W figures from July, August, and September; and annually adjusts benefit checks based on this average.
In 2025, your benefits will be 2.5% higher than they are now.
The problem with the COLA
You might have noticed a peculiarity regarding the metric employed by the SSA. The CPI-W tracks prices for workers, not retirees. Retired individuals have distinct spending needs, with healthcare being one of the main differences. Retired Americans typically allocate a larger portion of their income towards healthcare, and healthcare costs have been rising faster than most other categories for quite some time.
Even if this disparity is minimal – usually only a fraction of a percentage each year – over time it accumulates, and the disparity becomes substantial. The TSCL estimates that seniors have lost over 30% of their purchasing power since 2000.
Calls have been made to switch to a metric that more accurately reflects the spending of seniors specifically, but little progress has been made. In the interim, seniors must confront the reality of their budgets being squeezed.
Meticulous financial planning has never been more crucial
Prudent investment planning with retirement in mind can help you avoid the pain of insufficient savings when retirement approaches; maximizing personal savings is essential, especially in tax-advantaged accounts. If your employer offers matching contributions to a 401(k), make every effort to save enough to reach your employer's limit. You're forfeiting potential income if you don't.
If you're nearing retirement, consider postponing when you do so. While you can begin claiming SSA benefits at age 62, delaying until age 70 maximizes your monthly benefit. The difference can be substantial.
Despite the annual cost-of-living adjustment (COLA) increasing Social Security benefits, many retirees struggle to afford basic necessities due to rising healthcare costs, which disproportionately impact retirees. To combat potential financial shortages during retirement, it's essential to engage in rigorous financial planning, including prudent investment planning and considering the benefits of delaying retirement to maximize Social Security income.