Retirees say Social Security COLA is no match for inflation

When Social Security's cost-of-living adjustment was announced for this year, many retirees were overjoyed. Now, just two months into 2023, most seniors doubt it will be enough.

The new COLA, set at 8.7%, was the biggest boost to the benefit since 1981, and the increased payouts began last December. But according to a new survey by the Senior Citizens League, 54% of elderly Americans think it won't keep up with inflation this year. In fact, the same percentage said their expenses rose by more than 8.7% in 2022 — meaning the adjustment wouldn't have been enough last year, either.

"They're concerned that even as high as it is, their actual household expenses in 2022 really exceeded the amount that they're getting," said Mary Johnson, a Social Security analyst at the Senior Citizens League, a nonprofit advocacy group in Alexandria, Virginia. "So they don't believe they're going to be able to catch up, even with inflation moderating, because they're in such a big hole."

Financial advisors traditionally think of retirement income as a stool with three legs: cash savings, a retirement plan — such as a 401(k) or IRA — and Social Security, which will pay roughly 67 million Americans more than $1 trillion this year. Even in ordinary times, the New Deal-era program is a crucial resource. Half of all elderly Americans receive at least 50% of their household income from Social Security, and about 25% depend on it for at least 90% of their income, according to the Social Security Administration.

But in recent years, the massive entitlement program has become even more important as the other two stool legs have taken a beating. In 2022, retirement portfolios plunged as stocks wobbled and sank — at the end of the year, the S&P 500 was down 19.4%, its worst yearly performance since 2008. Meanwhile, cash savings lost value as inflation soared — last June, the consumer price index rose year-on-year by 9.1%, a rate not seen since the early 1980s. All of this has shifted more weight than ever to the Social Security leg of the stool.

How has the program handled all that pressure? Not quite as well as it should have, according to the Senior Citizens League. Johnson calculated how much Social Security should have increased to match monthly inflation from 2020 to 2022, and found that, on average, the benefit fell short by $1,054 per beneficiary in that time period.

That may not sound like much, but in an era of historic inflation, every penny counts. Over the past seven months, the CPI's year-on-year increase has slowed to 6.4%, but that hasn't made groceries and other necessities any cheaper.

"Even though the rate of inflation has gone down, a lot of seniors haven't seen prices go back down," Johnson said. "Many are carrying debt on credit cards, or maybe they've applied for food stamps or they're visiting food pantries."

In its annual review of the entitlement, the federal government doesn't always authorize increases. The boost in 2021 was 5.9%, after 1.3% in 2020. 2015 was the most recent year in which there was no increase.

Other retirees face less dire scenarios, but they're still feeling the squeeze. In those cases, some helpful tips from a financial advisor can go a long way. David Edmisten, the founder of Next Phase Financial Planning in Prescott, Arizona, said the main thing is to plan ahead.

"For retirees who are concerned about the impact of inflation on their finances, there are a couple of foundational strategies that can help," Edmisten said. "First, keeping 18 to 24 months of expenses set aside in a cash reserve can provide readily available funds for spending, even as costs increase, and reduce the need for retirees to liquidate their investments when markets are down."

And if they're "savvy," Edmisten said, some retirees can even turn inflation to their advantage.

"Higher interest rates mean there is more interest income to earn on savings accounts, CDs [certificates of deposit] and bonds," he said. "By exploring options such as high-yield online savings accounts, Treasury bills and I-Bonds, and even CDs for a year or two, retirees can earn a much higher amount of interest than in recent years."

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It's also important to make choices. Tracy Sherwood, the president of Sherwood Financial Management in Williamsville, New York, said she encourages her retired clients to determine which of their expenses they value most.

"They may not be comfortable doing everything they planned to do this year or next year, considering higher inflation," Sherwood said. "By helping them identify what is important, making trade-offs to continue doing those things they find most fulfilling, we can hopefully avoid having them fall into a rut and scrapping their plans altogether."

Whatever plan clients decide on, conditions may change. That's why Spencer Stephens, the owner of Rooted Interest Financial Planning in Salt Lake City, recommends meeting with clients regularly to make updates.

"Continually reviewing a financial plan is very important because it is easy to focus on living today instead of achieving dreams down the road," Stephens said. "Our short-term choices have long-term implications."

When all else fails, retirees can get creative. Johnson herself said that as the price of eggs skyrocketed in recent months, she began accepting the generosity of a neighbor who has her own chickens.

"I only go over there about once every six weeks or so," Johnson said. "I don't abuse my invitation."