What to Do When Social Security COLAs Can’t Keep Up With Reality

Unemployment continues to hover at a 50-year low while inflation remains stubbornly high — a conundrum for the Federal Reserve, as well as for clients who are fully retired and have claimed Social Security. These clients feel the pinch at the grocery store, with property taxes and insurance and when paying for health care services.

Relying on Social Security’s Annual COLA

One of the most important parts of the Social Security law is the built-in annual cost-of-living adjustment (COLA). Each year, retirees and others who receive Social Security benefits look forward to an increase in their January deposits. The additional dollars are critical for a positive outcome in retirement income plans.

Especially in times of sharply rising costs.

Yet each year when the COLA is announced, retirees are disappointed. They lament the increase is not sufficient to cover rising costs for their essential expenses.

COLA History

The original Social Security law did not include any provisions for increasing benefits. However, after World War II, it was clear retirees were losing significant purchasing power.

In 1950, Congress voted for a one-time adjustment of 77%. Two years later, Congress increased benefits by 12.5%, followed by a 13% increase in 1954. And so on.

COLAs were sporadic at best and left to the whims of the sitting Congress. There was no standard upon which increases were based. The results were negotiated in various bills making their way through Congress.

The COLA Conundrum

Annual COLAs became a permanent part of Social Security in the 1972 Amendments. While crafting the rules, Congress selected a common, reliable, repeatable baseline to determine an annual COLA. The best alternative was the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers, known as the CPI-W.

But it’s not a perfect fit to determine costs for older Americans. One group of economists believes CPI-W overstates inflation. Another group thinks it understates inflation. Some prefer the Consumer Price Index for All Urban Consumers, or the CPI-U.

Others want to implement the CPI-E (E for Elderly) that tracks spending on goods and services used by those 62 and older. But the CPI-E does not represent all Social Security beneficiaries:

• Six million beneficiaries are survivors, including young mothers and their children.
• 10 million are younger disabled folks.
• A large percentage of folks 62 and older are not retired.

So, we have a COLA conundrum.

Let’s Not Split Hairs

At the core of the matter shouldn’t be which Consumer Price Index to use as the benchmark. There are pros and cons to each. The real issue is that the annual increase is simply too small to cover retirees’ actual rising grocery bills and health care expenses.

Clients who retired in 2008 — 15 years ago — have seen an increase of 43% in their monthly gross Social Security benefits, based on CPI-W.

An initial monthly payment of $2,212 in 2008 is now $3,171, according to a Social Security analysis. That’s a $959 increase in monthly payments over 15 years, or $64 per month. Cash flow is the real problem.

Retirees Need More Than Social Security’s COLA

Social Security was never intended to be a retiree’s only income source. There are many other dots to connect to help clients address rising costs over a long retirement. These strategies can help clients understand how they can plan for and successfully handle never-ending rising costs:

• Discuss how their portfolio, and not Social Security, must do the lion’s share to address rising costs. Investments aiming for growth are needed to offset higher prices.
• Factor in Medicare Part B premiums properly. When Social Security benefits rise, so does the Part B premium. Make sure cash flow outlooks include faster-than-average rising Part B premiums.
• Send out annual reminders to reassess Part D drug plans and costs of drugs. They can change dramatically, without any notice, and it’s up to each client to stay on top of price changes and find savings.
• Discuss the client’s role in periods of high inflation. If they feel pressure on their resources, help them find places to cut back and make tradeoffs.

Blaming Social Security’s COLA for not delivering a substantially higher income each year is not a winning position. The goal is to deliver more cash to buy groceries. That’s a key role of a retiree’s portfolio.

Marcia Mantell is the founder and president of Mantell Retirement Consulting Inc., a retirement business and education company supporting the financial services industry, advisors and their clients. She is author of “What’s the Deal with Retirement Planning for Women?,” “What’s the Deal with Social Security for Women?,” “Cookin’ Up Your Retirement Plan,” and blogs at BoomerRetirementBriefs.com.