Social Security Shortfalls: Purchasing Power Eroded Significantly Since 2000

Is inflation finally beginning to subside?

It appears that could be the case – at first glance. You may recall the consumer price index (CPI) for March came in especially high and hot: 8.5%. As I’ve pointed out before, the year-over-year increase in consumer prices hadn’t seen that big a jump since December 1981.[1]

So when April’s 8.3% CPI was announced last week, it made sense we’d see suggestions that inflation could finally be heading for the exits. Even one CNBC article written in the wake of the most recent CPI announcement began, “At last, consumers are starting to see some relief.”[2]

But are they?

At 8.3%, the headline inflation number is still at a 40-year high. Then there’s the trend in core inflation, which is the inflation rate minus volatile food and gas prices.

From February to March, core inflation increased by only 0.3%. That raised the possibility inflation was slowing. But from March to April, core inflation regained momentum, rising 0.6%. A bad sign, noted experts.

Here’s one example: “The re-acceleration in core inflation is unwelcome,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, an economic research firm.[3]

So while a first glance at the latest inflation figure may indicate improvement, a second look at the numbers raises the possibility it actually could be getting worse. And as bad as that news is for all Americans, it may be especially troubling for seniors.

Inflation can be especially challenging for older Americans, who often are either retired or working much less than they once did. But data released last week by a senior citizens advocacy group highlights just how vulnerable retirees can be to inflation’s effects (details below). It turns out that Social Security has suffered significant erosion in purchasing power over the last two decades.

And this revelation comes on the heels of another report that illustrates the substantial increase in retirement health care costs seniors face as a consequence of just short-term high inflation.

Once again, in the reports, we’re looking at information that underscores older citizens’ vulnerability to the effects of inflation – as well as how important it is that those older citizens implement measures designed to mitigate inflation’s potential damage.

Later in this article, I will discuss an asset that could serve as one potentially useful component of a senior’s inflation-fighting strategy. But before I do, let’s discuss the numbers I just referred to in greater detail. There’s a fair bit to break down here and I want to be sure you understand what’s going on – as well as what’s at stake.

Social Security’s Purchasing Power Dropped by 40% in Last Two Decades

The Senior Citizens League (TSCL) is an advocacy group for – surprise – senior citizens. TSCL had some bad news for its constituency last week at the same time the Bureau of Labor Statistics informed us that high inflation was still high. According to research by the organization, inflation has eroded the purchasing power of Social Security by 40% since 2000.[4]

Readers might be wondering how that’s possible. After all, Social Security recipients benefit from regular cost of living adjustments (COLAs). Surely those have offset the impact of inflation through the years – right?

Wrong. A Fox Business article on TSCL’s revelation informs us that while COLAs have increased Social Security benefits by 64% since 2000, standard senior expenses have increased by a lot more: 130% through March 2022.[5]

The erosion of Social Security’s purchasing power by 40% obviously is significant in more ways than one. It also is significant in the historical context of the research.

Mary Johnson, a policy analyst at TSCL explains: “That’s the deepest loss in buying power since the beginning of this study in 2010.”

For Social Security recipients to enjoy the same purchasing power they had 22 years ago, TSCL says the monthly benefit would have to be increased by roughly $540.

“Retirees know all too well that Social Security benefits don’t buy as much today as when they first retired,” Johnson said.

And as bad as this news is, the outlook for American seniors’ financial stability could be even worse if you factor in the acute, high inflation we’ve been experiencing over the past several months. A report issued recently by HealthView Services, a company that provides retirement healthcare cost data to the financial services industry, reveals that even short periods of high inflation can significantly increase what seniors will spend on health care in retirement.

Let’s spend a few minutes unpacking that bit of unhappy news.

Healthcare-Cost Implications of Short-Term High Inflation Can Be Profound

In its comprehensive report titled “The Long-Term Impact of Short-Term Inflation,” HealthView clarifies the significant healthcare-based financial challenges retirees can face after short periods of high inflation.

According to the report, healthcare inflation historically has risen at the rate of between 1½ to 2 times the consumer price index. At the time the analysis was being done (February 2022), CPI was 7.9% (current CPI is 8.3%). Those who assembled the report assumed for the sake of the study that CPI would persist for a period of two years at 7.9%. So they looked at the impact on the total lifetime healthcare costs of seniors who experience healthcare inflation at a projected lower-end rate of 11.85% (1½ times CPI of 7.9%) for a period of two years.[6]

Here’s what HealthView determined:

For a 65-year-old couple, healthcare costs would increase by $85,917, raising the projected lifetime total for the pair to $673,587. For a 55-year-old couple expecting to retire in 10 years, the costs would rise by $160,712 (and result in a lifetime total of $1,073,717). And for a 45-year-old couple, the cost of retirement healthcare would increase by $259,808 and contribute to a lifetime total of $1,770,276.

There are, of course, seemingly countless components to healthcare costs, all of which are affected by the intensified healthcare inflation rate. There was much applause in response to the outsized 5.9% Social Security COLA for 2022, but no sooner did we hear about that than we learned Medicare premiums were increasing by 15%.[7] And Medicare premiums represent just one small part of the total healthcare costs seniors face.

“Even when adjusted for higher Social Security COLAs, the portion of retirement budgets required to cover healthcare will be significantly higher than most expect: A 45-year-old couple will need to invest an additional $27,000 today just to cover the increase in future expenses resulting from higher inflation,” said Ron Mastrogiovanni, founder & CEO of HealthView Services. “Unlike other consumer goods and services, such as gasoline, healthcare costs historically do not increase and decrease – they only go up.”[8]

It seems that seniors have – and will have – their hands full dealing with both the current and projected effects of the inflation we’re experiencing right now. According to The Senior Citizens League, half of America’s seniors have spent down their emergency savings. Nearly half have either applied for food stamps or visited a food pantry. Forty-four percent have incurred credit card debt to afford the essentials that inflation is making unaffordable.[9] And as I wrote in a previous article, some seniors also are exiting retirement altogether and going back to work.

………

[1] Jeff Cox, CNBC.com, “Consumer prices rose 8.5% in March, slightly hotter than expected and the highest since 1981” (April 12, 2022, accessed 5/18/22).

[2] Mike Winters, CNBC.com, “New inflation data is out—here’s what it says about the state of the U.S. economy” (May 11, 2022, accessed 5/18/22).

[3] Jeanna Smialek, New York Times, “Consumer Prices Are Still Climbing Rapidly” (May 11, 2022, accessed 5/18/22).

[4] Megan Henney, Fox Business, “Inflation has eroded 40% of Social Security’s purchasing power since 2000” (May 13, 2022, accessed 5/18/22).

[5] Ibid.

[6] HealthView Services, “2022 Retirement Healthcare Costs Data Report Brief: The Long-Term Impact of Short-Term Inflation” (March 15, 2022, accessed 5/18/22).

[7] Lorie Konish, CNBC.com, “How inflation, Medicare and taxes could eat away at your Social Security cost-of-living adjustment for 2022” (November 15, 2021, accessed 5/18/22).

[8] PR Newswire, “Healthcare Costs in Retirement: The Long-Term Impact of Short-Term Inflation” (March 16, 2022, accessed 5/18/22).

[9] Paul Brandus, MarketWatch, “Inflation is making some seniors choose between food and medications – what you can do” (February 19, 2022, accessed 5/18/22).