Americans are still feeling the squeeze of higher prices, but today’s rampant inflation also means retirees could soon benefit from the highest boost to Social Security in over four decades.
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The average Social Security benefit is currently $1,656, and for many seniors, this monthly check is their only source of income. With budgets straining, older Americans are anxiously awaiting the announcement of 2023’s cost-of-living adjustment (COLA).
Well over half of all older households do not have savings to fall back on, says Mary Johnson, Social Security and Medicare policy analyst at advocacy group The Senior Citizens League.
“About 90% or more of their income is coming from Social Security alone,” Johnson explains.
“So that particular type of retiree is very dependent on Social Security and they’re very dependent on a COLA that is adequately keeping up with the rate of inflation.”
But even though this will likely be the largest Social Security COLA most recipients will have ever received, advocates say flaws in the system are leaving seniors behind.
2023 COLA could be the biggest since 1981
The Senior Citizens League predicts that next year’s Social Security COLA could hit 8.7% — the highest boost since 1981. This would lift the average retiree benefit by about $144.
The official COLA announcement will likely arrive sometime around Oct. 13, after the September inflation data is released.
Yet Johnson and other advocates argue that the current formula for ensuring Social Security keeps up with inflation is flawed.
The COLA is not based on the spending patterns of older and disabled adults who make up the majority of Social Security recipients, Johnson notes. Instead, it is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
She indicated in a Wednesday press release that this calculation gives greater weight to gasoline and transportation costs. While transportation is one of the fastest growing spending categories for seniors, other priorities are increasing in price even faster.
“I would say while this is currently a chronic problem every year, yes, indications are that the COLA will not reflect pockets of persistently high inflation affecting retired and disabled Social Security recipients. That puts tens of millions of retirees at risk of continuing to fall behind,” Johnson says in the brief.
“The lifeboat is leaking and taking on water leaving older Americans at risk of financial drowning.”
Johnson recommends surveying the spending behavior of older and disabled adults to determine how to more accurately weigh each category in the index.
For example, seniors tend to spend more time in their homes — which means they could contend with higher energy costs for heating and electricity.
The Bureau of Labor Statistics reported that August prices for electricity jumped 15.8% from a year ago, marking the biggest 12-month increase since the period ending August 1981.
Seniors also use “twice as much or more” in health care services compared to younger folks, Johnson says.
She suggests developing the Consumer Price Index for the Elderly (CPI-E) further and using that measure to calculate the annual COLA instead.
This year’s COLA did not keep up with inflation
Seniors received a 5.9% COLA in January, but that wasn’t enough to compensate for skyrocketing inflation this year. In fact, Johnson calculates that the benefit fell short by 48% in the month of August.
The fastest growing spending categories for retirees this year has been food, housing and transportation (in that order), she adds.
“Their biggest cost is at the grocery store. And that has been significantly challenging for roughly one out of every two older households.”
And while inflation appears to be moderating, Johnson cautions against expecting it to decline significantly in the upcoming months.
Gas prices dropped significantly near the end of the summer, but she points out that households will be spending more on home heating oil in the coming colder months.
The next COLA also has to account for rising health care costs, which are eating up more and more of recipients’ monthly checks.
The Kaiser Family Foundation reports that within the last two decades, Medicare Part B premiums alone rose from 6% to 10% of the average Social Security benefit. If you factor in Part A and Part B deductibles for hospital and physician services as well, total costs have jumped from 15% of the average Social Security benefit in 2002 to 19% in 2022.
What can seniors do?
Johnson recommends that seniors with savings speak to a financial adviser and budget an extra 10% to deal with current inflationary pressures.
You can talk to someone at your financial institution, but plenty of senior centers, libraries or community colleges may also have financial presentations and workshops or advisers who you can chat with.
Aside from your everyday needs, Johnson also advises that you prioritize budgeting for your medical care, since the cost of medical services and premiums could continue to go up.
Look into your medical coverage and out-of-pocket maximums and determine exactly how much you need in savings for a worst-case scenario.
Out-of-pocket spending on prescription drugs has been a major concern for seniors, although President Joe Biden’s Inflation Reduction Act will “help tremendously,” Johnson says.
The law will limit insulin copays to $35 per month starting in 2023 for Medicare beneficiaries, penalize pharmaceutical companies for imposing drastic price increases and cover vaccinations for Medicare and Medicaid participants.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source: https://finance.yahoo.com/news/lifeboat-leaking-many-seniors-still-110000075.html