As a retiree myself, the recent news regarding Social Security benefits has me worried and troubled. Not only for me, but for the millions of people who are struggling to maintain an acceptable standard of living while relying on these benefits. I write about retirement planning here on this blog, and when things like omitting the cost of living adjustment occur, it’s an emphatic reminder that we all must plan appropriately for our golden years if we want to be able to enjoy them.
Beneficiaries will not get a cost of living adjustment (COLA) in January 2016, the Social Security Administration (SSA) announced this past Thursday. For seniors and others receiving benefits, this can make managing finances a more difficult experience. Despite the continuing increases in the prices of food, housing, medical care and prescription coverage, inflation was negative when compared to last year’s third quarter measurement of the Consumer Price Index (CPI) by the Department of Labor. This comparison data has been used since the 1970’s to determine the COLA and for just the third time in history (and the third time since 2010), there will be no adjustment made.
The reason for this is that the price of gasoline has dropped so dramatically since last year (about 25%) that it has affected the overall number actually creating a drop below zero in inflation. The problem for Social Security beneficiaries is that gasoline prices do not affect them as much as younger people who drive more frequently, both on their commute to work and for travel.
There are over 70 million Americans now receiving Social Security including retirees, SSDI and SSI recipients, federal retirees, and disabled veterans. That number will continue to grow as baby boomers continue to retire in the millions.
I think that most of us are well aware that the prices of just about everything are rising, despite the cost of gasoline dropping. I can tell you that personally I have observed the price of food increasing and if you have purchased eggs, butter, or ground beef, among other things, you will likely agree. In addition, with my wife and I having health issues, we just received notices that all of our prescription costs will be increasing under our Medicare supplemental insurance plans and that even some doctor visit co-pays will be going up as well. The premiums on our insurance plans (with the exception of Medicare itself) will be increasing as well.
If you look at the raw numbers, you might assume that the “negative” inflation number that the Labor Department has released would mean that there wouldn’t be any problems in skipping an adjustment in 2016. But many other sources report that “real” inflation—the number without the gasoline factored in—is much higher. Numbers like 4% are being used to describe the rate by AARP and USA Today. Even the Department of Labor statistics show that there have been increases in lots of major categories.
If I can interject my own opinion here, the cost of gasoline, despite its current plunges in price, is in no way expected to remain low for the long term. In fact, all one has to do is to look at the rise in oil and gas consumption all over the world as countries like India and China grow their economies and increase their needs. I don’t want to be a pessimist, but realistically, our dependence on fossil fuels has long been spoken of, and our production of oil and exporting it has become a way for us to become more energy independent. Those desires mean to me that we will all be using fossil fuels for many years to come even though there has been growth in solar, hydro, and wind power. Automobiles will be using fossil fuels converted to gasoline to power them well into the future and those prices will be higher and higher down the road.
This brings me back to the most important point of all. Social Security was never meant to be the sole source of income for people to live on in retirement. It is only supposed to supplement your income. Unfortunately according to the SSA, 24% of retirees have only their Social Security deposits to live on with an average retiree benefit amount of just $1,290 per month. And just as shocking as that 24% number, about half of those aged 55-64 have saved just $104,000 or less to retire on. That’s only about 20% of what they will likely need based on life expectancy and inflation over their lifetimes.
You simply must start contributing to some kind of retirement plan as soon as you start earning an income, and the younger you are, the better off you will be!
There is a movement afoot to have the CPI changed to be more relevant to retirees’ spending habits so that there can be some adjustments to Social Security and avoid years like 2016. The Senior Citizens League has been meeting with government officials to review the possible changes.
But the real issue currently is that people haven’t saved enough, and even those who did a better job of it were hurt very badly by the recession in 2008. Both housing equity and investments took a huge nosedive from which many haven’t fully recovered. In addition, so many people have been unemployed or underemployed during the past 8 years that they couldn’t fully fund their retirement accounts the way they wanted to. The combination of those factors have brought us to where we are today.
I know it is very difficult to think about your retirement when you are young and you’re involved in things like enjoying your active life, getting a place of your own, meeting that special someone and even getting married and raising a family. But there’s no way around it, you must get started early and make it a priority. If you are counting on inheriting money from your parents, or you think the government will take care of you when you stop working, I’m here to say that just doesn’t happen. And although you may be invincible with your health today, it’s not a guarantee that you won’t need expensive healthcare when you’re older. So look at the big picture and prepare as soon as possible.
If you’re already retired, will the lack of Social Security COLA in 2016 affect your finances? If you’re not retired yet, do you have a retirement plan in place now to be on track for the future?
Image courtesy of 401kcalculator.org (with changes)