Increases in Social Security payments, which are linked to a key measure of inflation, are expected to rise significantly for the rest of this decade. By looking at historical data on annual hikes in Social Security payments, the average monthly payment for retirees by 2030 is expected to have climbed to more than $2,000, according to an analysis by Better Benefits Guide. Consider working with a financial advisor as you plan your retirement or update your retirement plans.
Where Social Security Fits into Retirement Planning
One of the most important challenges in making financial plans for your retirement is how much actual buying power you will have. That means being able to estimate what will be coming in and what will be going out: the former includes estimates of what pensions, tax-advantaged plans like IRAs and 401(k)s and Social Security will provide; the latter includes inflation, cost of living and taxes.
It’s sometimes helpful to think of Social Security as one leg of the three-legged stool of retirement. The other two legs are individual retirement savings and pensions from employers. Yet as pensions disappear as an employee benefit and many people struggle to build retirement savings, Americans rely on Social Security more than ever before. And that’s why the size of Social Security payment hikes are closely watched.
Why Social Security Payments Have Been Rising
Since 1975 the federal government has regularly adjusted Social Security payments higher in response to the rising cost of living. These cost-of-living adjustments (COLA) are tied to the constantly growing Consumer Price Index-Urban, or CPI-U, one of the more common gauges of inflation. In 2001 the average monthly Social Security payment was $874, while today it is around $1,657, according to Better Benefits Guide.
At the current rate of COLA increases, the average monthly Social Security benefit in two years could be more than double what it was in 2001.
What’s Ahead for Social Security Payments?
Since 2001 the average yearly hike in Social Security payments has been 3.08%. That exceeds the yearly hike in the CPI-U, which has climbed an average of 2.19% in the last two decades, the group said.
It also concluded that if Social Security payments keep rising in line with increases in the Consumer Price Index then the average monthly Social Security check could climb to $2,112 by 2030.
Will Social Security Payment Hikes Match Rising Retiree Expenses?
It’s doubtful. Since the CPI-U is based on the average monthly consumption of all urban consumers – including the tens of millions who are younger and healthier than seniors – the actual medical costs of many Social Security recipients far exceed those reflected in the CPI-U.
In fact, an ongoing study conducted by the Senior Citizens League (SCL) indicates that high inflation has caused Social Security benefits to lose 40% of their buying power since 2000. Social Security purchasing power plummeted 10 percentage points alone from March 2021 to March 2022 – the largest drop recorded to date.
Comparing the Social Security COLA with price increases in a basket of goods typically purchased by retirees, the SCL found that prices rose across the board, with a steep 14.5% increase in Medicare Part B premiums alone. For a quarter of survey respondents, after deducting their total health and drug plan premiums, the 2022 COLA only increased their available Social Security benefit by less than $25 a month.
The Bottom Line
Inflation is to your spending power as rust is to iron: a constant corrosive force that whittles away at the buying power of your money. Social Security payment increases have exceeded increases in the CPI-U over the last 20 years. However, given that seniors tend to spend more on medical care than other cohorts, increases in Social Security payments may not be covering costlier medical care that many retirees face.
- A financial advisor can help you prepare for both higher inflation and expected increases in Social Security payments so you can plan more confidently. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s no-cost Social Security calculator to get a quick estimate of what your monthly benefit will be.
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