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The Consumer Price Index (CPI) has retreated from its 2022 highs, but for many Americans, the good news ends there. For example, from April 2021 through June 2023, inflation outpaced wage growth.
As a result, many workers are still struggling to come out ahead and it will likely take a lengthy run of muted inflation and real wage growth to put the inflationary pressures of the past two-plus years fully in the rearview mirror. Not to be forgotten is the point that the purchasing power lost by consumers from 2021 through last year is gone forever. It will never be reclaimed.
On that note, thinking about inflation and the pressure it puts on those workers, it’s even worse for retirees whose primary sources of income are retirement accounts and Social Security. While there’s optimism that inflation will decline to 3% by the end of 2024, that’s still above the Federal Reserve’s desired target of 2% and high enough to make Social Security’s cost of living adjustment (COLA) inadequate.
In fact, that’s the view many seniors have of the 2024 COLA of 3.2%. Of course, it can be said that a 3.2% increase is better than nothing, but that prosaic view obfuscates the fact that many seniors are still felling inflationary burdens and Social Security benefits aren’t enough to alleviate that pressure.
Inflation Acts as Social Security Tax
Making the Social Security COLA situation worse is the point that inflation is acting as a tax on those benefits, but recipients have already paid taxes into the program. It’s as if they’re being taxed twice for no good reason.
It’s no wonder that 62% of the respondents in a recent Atticus survey said they view the 2024 COLA as inadequate and almost the same percentage said their current Social Security benefits aren’t enough with which to get by.
“70% of single seniors struggle financially with their existing Social Security income,” according to Atticus. “Nearly 40% of seniors plan to find work due to the modest COLA increase, with almost half of single seniors (47%) considering employment to supplement their income.”
Of course, there are tangible financial benefits (and tax consequences) to working while receiving Social Security, but that proposition should be choice, not necessity. Unfortunately, as the Atticus study confirms, many Social Security recipients are remaining in the workforce or reentering because they have to, not because they want to.
Other Inflationary Woes for Advisors to Note
As advisors know, economists’ preferred measure of inflation in the U.S. often excludes energy and food prices because those are purported to be volatile. Some go even further and exclude other necessities. That’s how absurd takes on inflation arise. So absurd that they’re essentially misinformation.
Even if gas prices are declining (they are), food costs aren’t and seniors still face a slew of other elevated costs that are pinching their Social Security checks while rendering the 3.2% COLA almost worthless.
For example, one 65-year-old woman told Atticus her home energy, insurance, heating, and food costs are up 8-14% while a 75-year-old woman told the research firm her Medicare supplemental tab exceeds the Social Security COLA. The point: advisors have their work cut out for them when it comes to working with inflation-strained senior clients, but it’s work that needs to be done.
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