Inflation’s Impact on Social Security and Retirement

By Britt Erica Tunick

If you have been to the grocery store, bought gas, or purchased pretty much anything lately, you have likely noticed that inflation is on the rise. Fortunately for retirees, that reality has not been lost on the Social Security Administration, which is making its largest increase since 1985.

The Social Security Administration has announced that its 2022 cost-of-living adjustment (COLA), which relies on the consumer price index to determine the overall increase in the average cost of living each year, will be a 5.9% increase. While this change will help individuals who are already retired, or those retiring soon, it may not be enough to cover all of the increased costs you might encounter and you may need to make additional budget changes to deal with inflation.

If you are already retired and heavily dependent on your Social Security income, following are a few things to consider as prices continue to soar:

• Reviewing your budget is always the best place to start when trying to rein in expenses. Look at your credit card bills and spending habits and see if there are any fixed monthly costs that can be scaled back or eliminated. Also, for things such as cable service or cellular phone contracts, it is always worth a call to customer service to see if there is a way to cut your bill, or a look at competitors who may be offering lower introductory packages to attract new customers. Many customer service departments will make alterations to monthly package rates if you point out that their competitor is offering lower prices and that you are willing to switch providers.
• Make sure you have a clear budget that outlines where the money you receive each month can be spent so that know exactly where you stand.
• If you have retirement investments that aren’t generating sufficient returns, it may be worth speaking with a financial advisor to see if you should reallocate any of your investments, or if it makes sense to deviate from traditional risk levels for your age range, given the recent market performance and inflation rates.

Meanwhile, the increase in Social Security payments also means that cash reserves in the Treasury Department’s Old Age and Survivor’s Trust Fund are on course to be depleted by 2033 if significant changes are not enacted by Congress to increase the coffers. Social Security beneficiaries would still continue to receive 76 percent of their benefits from tax funding.  While the reduction in benefits is unlikely to happen and Congress is certain to intervene by then, given how many people in the U.S. rely on Social Security benefits when they retire, it should serve as a wakeup call for anyone counting heavily on those benefits in their retirement planning.

Following are a few things to further consider and research more thoroughly when factoring Social Security payments into your retirement plans, particularly if you will not be retiring for at least another decade:

• Social Security is only designed to account for 40% of the income you have before retirement, so it is important to make sure you are prepared to account for the rest of that income, or to take steps to significantly change your lifestyle so that you won’t come up short.
• The longer you wait to begin collecting Social Security, the more you will get–up to the maximum amount that you are eligible based on your pre-retirement income and the caps that exist. Anyone born before 1955 has the option to collect Social Security starting at age 62, but doing so means accepting 25% less than you are ultimately entitled to. If you wait, the amount you are eligible to receive goes up 8% each year, until you reach age 70.
• Social Security benefits are actually taxable, depending on your individual financial situation. The income threshold where Social Security benefits begin to become partially taxable is $25,000 for single filers and $32,000 for joint filers.
• You may have to pay premiums for Medicare, which are deducted from the dollar amount of Social Security that you receive.