The Decreasing Value of Social Security Benefits

Being in the financial industry means that I have plenty of opportunities to bestow my financial wisdom on my kids, even if it usually entails a common reaction from them – eye-rolls and heavy sighs – as they think, “great, here he goes again”. While my advice may not always be fully appreciated by the girls (at least not in the moment), I do want to instill in them some basic common sense to prepare them for the real world. 

I got another chance to practice this recently after Sophie and Phoebe got back from the Braintree Mall. Sophie had been saving a portion of her paycheck each week that she earned from the Flying Bridge to buy a new pair of boots. I honestly don’t remember the brand name, but they had a pretty extravagant price tag. Too rich for my taste . . . but what do I know, right?  

Sophie had finally reached her goal and headed to the store, only to find that they had just raised the price of the boots. Needless to say, she was not happy. She had enough money to cover the cost, but the additional cost was not part of the plan.  For Sophie, it was a gut-wrenching decision to make. And since her Ol’Man is never at a loss for words when giving a life lesson, I explained to her that this is what we call “inflation”.  I went on to explain that in the real world, it means that the cost of goods and services goes up over time and your money won’t buy as much now as it used to – and it will buy even less in the future. From the “eye-roll” I received this didn’t cheer her up any, but I do hope this is a concept she remembers and uses in her future, especially now that she has experienced this first-hand.

You know, this got me thinking about how this plays out in the real world for so many people every day. One of the issues I help people deal with every day is how inflation will affect their lifestyle in retirement. You’d be surprised how many people plan for retirement based upon the dollars they spend today without considering how much less their money will buy over time. 

Let’s take Social Security for example. The Covid-19 crisis has upended the U.S. economy, and that’s bad enough for all of us. But it’s quite possible that older Americans will be hit by longer term effects, since many retirement portfolios have taken a hit, and they tend to be more reliant on their Social Security.

And unfortunately, retirees may encounter a lower Social Security cost-of-living adjustment in 2021, too. Based on data for the first quarter of 2020, the estimated Social Security COLA for 2021 could be just 0.8%, according to The Senior Citizens League, a nonpartisan advocacy group for older Americans. That would be a substantial reduction from this year’s COLA, which was 1.6%. In 2019, recipients got a 2.8% bump.

As disappointing as this is, however, it isn’t really something new. In fact, the CPI-W has been effectively “reducing” seniors’ real income for decades. To better understand this, let’s look at how Social Security’s inflationary gauge, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), has influenced the purchasing power of seniors’ Social Security dollars over the past 20 years.

The CPI-W measures the price changes for a predetermined basket of goods and services. The Social Security Administration then compares the average CPI-W reading of the current year to the average of the previous year. If the average has risen from one year to the next, it signifies inflation. And when there’s inflation, it means Social Security beneficiaries will receive a cost-of-living adjustment (COLA) in the upcoming year.

Hmmm . . . this makes sense, right? Well, folks, not really. 

You see, this calculation is flawed in my opinion. It tracks the spending habits of urban and clerical workers, neither of which are typically seniors nor Social Security beneficiaries. What this means is that the COLA is based on groups of people who don’t actually represent a majority of Social Security recipients. The CPI-W doesn’t reflect an accurate portrayal of the costs that seniors face (think medical care, food, energy, housing), and over-weights items that are less relative to seniors (education, clothing, etc.). According to The Senior Citizens League, this all adds up to a 30% loss of purchasing power for Social Security income since 2000.  Now let’s add inflation into the mix. 

On one hand, low levels of inflation would seem to favor consumers, and to some extent this is true. But there are two ways that a low-inflation environment can hurt Social Security payouts.

First, low levels of inflation tend to take away the incentive for companies to give their employees meaningful raises. Since the Social Security Administration takes workers’ 35 highest-earning, inflation-adjusted years into account when calculating your monthly benefit, an extended period of low wage growth can hurt your initial benefits or lower your overall lifetime benefits.

Second, a low-inflation environment will result in a smaller COLA being passed along to current beneficiaries. Over the past decade, the average Social Security COLA has been just 1.4%, which includes three years where there was no COLA at all due to deflation (2010, 2011, and 2016).

But just because broader levels of inflation are down it doesn’t mean that the costs seniors contend with are decreasing. In most years over the past decade, the costs for medical care have easily surpassed the COLA given to Social Security beneficiaries. As a result, the purchasing power of benefits has been further eroded.

For those who rely heavily on Social Security to pay their basic living expenses, this often means making some hard choices. Their dollars simply have to stretch farther. The solution? Plan for this. Your financial system should always take into account inflation in both your investment and income plans to better determine your needs in retirement. Make sure you’re using conservative inflation estimates now and you may avoid having to make some tough choices in retirement.

So as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at

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