Social Security Benefits Lose 40% of Buying Power

Rising Inflation Erodes Social Security’s Purchasing Power

Social Security benefits have lost 40% of their buying power since 2000, according to an ongoing study from The Senior Citizens League (TSCL), a nonpartisan consumer group.

TSCL policy analyst Mary Johnson, who conducted the research, explained that the loss of purchasing power means retirees can’t buy as much as they used to be able to on Social Security. “To put it in context, for every $100 of goods or services that retirees bought in 2000, today they would only be able to buy $60 worth,” says Johnson.

The study reported that Social Security benefits have increased by 64% since the year 2000, but the annual cost-of-living adjustment (COLA) that raises the benefit amount has not been enough to keep up with the breakneck pace of inflation. In that time, the costs of goods and services retirees purchase have risen by 130% — that’s more than twice the rate that benefits have increased.

In just the last year, Social Security’s purchasing power has dropped a full 10% — from a 30% loss of buying power in March 2021 to a 40% loss in March 2022. This steep decline was the largest ever recorded in the TSCL study, which compares Social Security’s COLA to the price increases of a variety of goods and services that retirees commonly use.

Johnson notes that while almost every good and service measured by the study increased in price, the erosion in purchasing power in 2022 was most felt in energy costs, food prices and a steep increase in Medicare Part B premiums.

Social Security COLA Expected To Rise to 8.6% in 2023

The TSCL report estimates that the Social Security COLA for 2023 could be around 8.6%, which would be the highest increase since 1981. However, the research suggests that even this might not be enough to curb the loss of purchasing power.

In 2000, the average Social Security benefit was $816 per month, according to the report. With the 2022 COLA, Social Security benefits rose to an average of $1336.90 per month, amounting to a 64% increase.

But because costs are rising so much faster than the benefit amount, purchasing power is lost. The study from TSCL estimates that Social Security benefits would need to increase to $1,8760.70 per month, or $539.80 more than the current average, just to maintain the same buying power the benefits had in the year 2000.

Retirees Look For Inflation-Proof Retirement Income

The steep increase in inflation has prompted many people who are retired or nearing retirement to look for sources of income to close the gap between what Social Security offers and what they need. This need for inflation-resistant income in retirement is part of the reason that annuity products marked their highest annual sales in more than a decade last year, according to the Life Insurance Marketing & Research Association.

Times of economic turmoil have proven to spur annuity sales, as evidenced by the fact that the last highest sales of annuity products was in 2008 during the height of the Great Recession. In times of financial instability, investors seek principal protection and guaranteed growth to offset the effects of inflation, which are both features that annuities can provide.

Annuities also offer a level of risk management that goes beyond traditional retirement products. Because annuities are an insurance product, they protect your principal and distribute a stream of guaranteed income you can’t outlive. Some investors use annuities to lock in the gains they’ve earned in good market years by moving those gains from pure equity vehicles to the protected growth of an annuity.