Social Security beneficiaries have lost nearly a third of their buying power since 2000 as the costs of items typically purchased by the elderly have significantly outstripped the annual inflation increases in their retirement benefits, according to a new report by The Senior Citizens League (TSCL) obtained by InvestmentNews.
But creeping inflation over the past 12 months may have a silver lining. Based on Consumer Price Index (CPI) data through April of this year, the consumer advocacy group estimates that the Social Security cost-of-living adjustment for 2018 will be about 2.1% — significantly higher than the paltry 0.3% increase this year.
Social Security inflation adjustment have averaged only 1% since 2012, including no increase in 2016. COLAs are based on increases in the CPI-W, which measures price inflation for urban workers, from the third quarter of the prior year to the corresponding quarter of the current year. The Social Security Administration will make its official announcement about next year's COLA in October.
Mary Johnson, chief policy analyst of The Senior Citizens League and author of the group's inflation study, noted that the 2.1% COLA estimate for 2018 could change between now and the fall since there are still several months to go before all the data is in. But, she said, the trend is clear: Inflation is picking up and seniors are suffering.
Since 2000, Social Security benefits increased 43% while typical senior expenses, as calculated by The Senior Citizens League's annual buying power report, have jumped 86%. The survey found that a person having the national average Social Security benefit of $816 per month in 2000 would have $1,169.80 per month by 2016 due to automatic COLA increases in most years. But because retiree costs are rising substantially faster than the COLA, that individual would require a Social Security benefit of $1,517.80 per month in 2017 just to maintain his or her 2000 level of buying power.
"Beneficiaries have just 70% of the buying power they did in 2000, making it more difficult for retirees, particularly those who have been retired the longest, to afford necessities such as medical care, food and housing," the study found.
"When costs climb more rapidly than benefits, retirees must spend down retirement savings more quickly than expected and those without savings or other retirement income are either going into debt or going without," Ms. Johnson said.
More than 60 million people received Social Security benefits last year. More than 70% of those beneficiaries were retired workers and their spouses and children, according to the Social Security Administration. About 10% of beneficiaries were the survivors of deceased workers and the remaining 18% were disabled workers and their families.
Even high-income retirees rely on Social Security for a substantial portion of their income. For nearly a third of investors with net worth of $100,000 to $1 million (excluding their primary residence), Social Security accounts for at least half of their monthly income, according to a 2016 white paper by the Spectrum Group, "Social Security: When and Why."
Senior advocacy groups, including The Senior Citizens League, argue that when it comes to measuring inflation experienced by retired and disabled individuals, the government is using the wrong index. The CPI-W gives less weight to medical care and housing costs — two categories that have experienced rapid inflation and represent a larger portion of the budgets of older households than younger workers.
The study examined the increase in costs of 39 key items that represent typical costs of elderly households between 2000 and January 2017. The study used the same weightings that the government uses in calculating the Consumer Price Index for the Elderly (CPI-E), an alternative measure of inflation that senior advocacy groups say is more representational of retirees' spending patterns.
For example, Medicare Part B monthly premiums have risen 195% to $134 in 2017 from $45.50 in 2000 and average out-of-pocket costs for prescription drugs have increased 184% to $3,132 in 2017 from $1,102 in 2000. The average monthly premium for supplemental Medigap insurance has increased 122% to $264.45 per month in 2017 from $119 per month in 2000, according to the study. Overall, average medical out-of-pocket expenses for people age 65 and up are nearly double today compared to 2000, rising from $6,140 per year to $12,125 per year.
Higher-income retirees, defined as single individuals with incomes that top $85,000 and married couples with joint incomes over $170,000, pay a higher monthly premium for both Medicare Part B, which covers doctors' fees and out-patient services, and Part D, which covers prescription drugs.
Those higher-income retirees subject to monthly Medicare surcharges may be in for a shock next year. New income brackets, based on 2016 tax returns, take effect in 2018. As a result, retirees who currently pay a high-income surcharge could pay even more next year, even if their income remains the same.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.