Seniors on Social Security have complained for years about the lack of their annual cost-of-living adjustments. Seniors got a pleasant surprise this year.
In October of last year, it was announced that seniors would be getting the most generous raise in decades. Many seniors breathed a sigh of relief following that news.
The reality is that a 5.9% COLA is already letting seniors down. Here's why.
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A big raise can't keep up with inflation.
Social Security raises are determined by third-quarter data from the Consumer Price Index. This year's 5.9% COLA is based on data collected between July and September of 2021, when inflation levels had already started to soar.
Since then, inflation has gone up even more. In December, the Consumer Price Index was up 7% on an annual basis, its highest spike since 1982. Even though we're only in January, seniors on Social Security are already at a disadvantage with regard to their buying power since their raise isn't enough to keep pace with current levels of inflation.
Seniors on Social Security who also enroll in Medicare Part B will not get the 5.9% raise in full because their premiums are deducted from their benefits. This year, Medicare Part B premiums rose a lot, so that will eat into seniors' COLA, as it has done in the past.
Personal savings are important.
Even with higher benefits to start off the year, seniors who are heavily reliant on Social Security may be struggling financially. It's important for future retirees to know the limited buying power of Social Security.
40% of the typical worker's pre-retirement earnings will be replaced by Social Security. Most seniors need twice that level of income to keep up with rising living costs and maintain a reasonable standard of living.
That's why it's so important to save your money on your own for retirement, whether in an IRA, a 401(k) plan, or another dedicated long-term savings account. The difference between covering retirement expenses with ease or struggling to make ends meet could be attributed to building a nest egg.
Social Security doesn't do a good job of helping seniors maintain their buying power when inflation isn't as high. The best way to compensate is to have income outside of the benefits.
It's not yet known how long rampant inflation will last. The cost of consumer goods hasn't peaked yet according to some experts. Social Security beneficiaries are sitting on the largest raise they've had in a long time, but if prices don't come down in the near term, it could be a very tough year for them.
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