Nearly every year since 1975, social security has undergone a cost of living adjustment (COLA). Benefits go up slightly, to reflect price increases, inflation, and other factors that make everyday living more expensive. The first year, it went up by 8%. Lately, rises have been smaller, but most years still see the amount go up at least a little. This year is no exception. Seniors collecting benefits will see them increase by a whopping five dollars, for a 0.3% increase—the lowest rise since these adjustments started.
We’ve talked before about why you won’t be able to depend on social security to support you when you retire. This latest incident demonstrates yet another reason.
The Actual Cost of Living
If you’re optimistic, you might argue that a small increase is better than none. Last year, benefits didn’t go up at all, nor did they in 2009 or 2010, in the wake of the economic crisis. However, even though they’ll technically be receiving more money next year, most seniors will still see their disposable incomes decrease
Social security uses certain metrics to determine how much to adjust benefits by. They compare the third quarter of the current year to that of the previous one, and look at their inflation rates, according to the Consumer Price Index for Urban Wage Earners. If prices have gone up, benefits do as well. If not, they don’t.
This metric works in theory, but it in practice, it’s not reflective of real price increases or actual costs of daily living for seniors. This COLA, like many of the ones in recent years, doesn’t reflect increases in the actual cost of living. A single quarter isn’t really an accurate measurement of the economy as a whole.
Price Increases Eat Additional Benefits
There are a number of specific examples of ways in which costs are rising for retirees more quickly than their benefits. One of the most important is Medicare. Premiums are going up for Part B of the senior health insurance plan, which covers doctors, outpatient hospital visits, and similar medical care. That extra $5 won’t be nearly enough to cover the difference.
Other costs are going up as well, from gas to food to clothing and more. Retirees live on a fixed income, and if the money they receive isn’t enough to cover basic expenses, then they’re in trouble.
Add to this the fact that social security benefits in general are due for a significant decrease in the near future. Experts estimate that by 2034, the fund will be completely depleted. At that point, the only money that will be able to be paid out will be what’s coming in that month from those still in the workforce. Full benefits will be decreased to 79% of their previous value, or less for those who opted to start collecting before age 66.
What to Do
It’s clear that you can’t rely on social security benefits for your retirement. It may be able to provide you with a small supplement, but without a separate, larger source of income, you won’t be able to support yourself once you leave work.
This is why it’s so essential to contribute regularly to your IRA/401(k). Always make the maximum annual contribution, to increase the amount you’ll have to live on. The sooner you start building up your nest egg, and the more diligent you are about putting money into it, the more comfortably you’ll be able to live in your golden years. With a little pre-planning hopefully you won’t need to rely on social security at all.