Retirees are getting a pay cut every year they receive Social Security benefits, and they need to realize that fact in order salvage their retirement years, advisors said.
Clients may have to scale back on their expectations, do better planning or look for other income options, they added.
Social Security benefits are increased most years based in part on the Consumer Price Index, but in reality the Cost Of Living Adjustments (COLA) have not begun to keep pace with inflation in recent years. Some years, like 2016, had no increase. This year it is slightly more than 2 percent, compared to increases in the early 1980s of 14 present and 11 percent. The rate of inflation is currently 2.4 percent.
The method of calculation skews the process even further, according to Brandon Buckingham, vice president and national director of advanced planning for Prudential Annuities. The general CPI, which is used to determine COLA increases, has two sub-categories: CPI-Workers (CPIW), which measures the basket of goods workers buy including transportation costs, and the CPI-Elderly (CPIE), which overweights health-care and housing costs, the two biggest expenses for the elderly. Medicare covers only about 51 percent of health-care costs in retirement.
“It would be better to use the CPIE to determine Social Security increases,” said Buckingham. “Otherwise, retirees are actually getting a cut each year. Social Security benefits are going to pay for a smaller percent of retirees’ needs each year.
“Pre-retirees are going to have to better prepare or retirees are going to have to cut expenses,” he added. “The earlier a person talks to someone who understands this issue the better.”
Max Barger, senior wealth strategist and senior vice president at PNC Wealth Management, said, “I look at this problem as a planning issue. Clients need to dial back the projections on what they will receive from Social Security so they do not get a false sense of security.”
Barger deals mostly with high-net-worth clients but also does probono work. He noted that people expect to get paid by Social Security because they have paid into the system all of their working lives.
“Based on Social Security’s small increases, some people may need to change their retirement goals,” he said. “For instance, they may not be able to move south, like they planned.”
Pre-retirees should max out their retirement plan contributions and get control of spending now, Barger said. “Don’t buy things you do not need; save the money instead,” he advised.