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Inflation Eats Up Social Security Benefits

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A lot of people have a vague sense that too much inflation might be a bad thing. But in a world where central banks and governments promote and implement policies intended to increase inflation by 2% annually, most people don’t seem to really understand just how much inflation erodes their purchasing power over time. After all, 2% doesn’t sound like a lot.

But you have to remember that this decrease in the value of your money compounds over time and it ultimately devastates savers and those on fixed incomes. Looking at Social Security benefits drives this reality home.

Every year, Social Security recipients receive a cost of living adjustment (COLA). The Social Security Administration recently announced the COLA for 2021 will be 1.3%.

According to retirement advisor Brian Anderson, the average Social Security benefit was $1,503 in January 2020. Using that figure, the average recipient will receive an increase of just under $20 a month next year.

Here are the COLAs over the last decade.

  • 2010 – 0.0%
  • 2011 – 0.0%
  • 2012 – 3.6%
  • 2013 – 1.7%
  • 2014 – 1.5%
  • 2015 – 1.7%
  • 2016 – 0.0%
  • 2017 – 0.3%
  • 2018 – 2.0%
  • 2019 – 2.8%
  • 2020 – 1.6%

The Social Security Administration calculates the COLA based on a formula that uses the “Consumer Price Index for All Urban Wage Earners and Clerical Workers” (CPI-W). Like most government numbers, it doesn’t actually reflect the actual cost of living for most retirees, as Wolf Richter explained in an article published by Wolf Street.

Actual costs of living for retirees – or really for anyone – are going to increase far faster, depending on where they live, how they live, and where they spend much of their money. Even if the actual cost of living increases by only 1 percentage point faster than the annual COLA every year, after 10 years, 20 years, or 30 years, you’re talking about a serious deterioration in purchasing power of the Social Security payments. Inflation will eat more than retirees’ lunch.”

This isn’t merely theoretical. According to Anderson, Social Security benefits have lost 33% of their buying power since 2000.

The Senior Citizens League analysis found that, over a 10-year period, average Social Security benefits of $1,075 per month in 2009 lost a total of $15,258 in financial growth from 2010 to 2019 when compared to the previous decade when COLAs averaged 3%.”

Investment advisor Dennis Miller sums it up.

You can rely on the Social Security payments. But they will lose purchasing power. The purchasing power of the payments will diminish every year, year after year, because the COLAs are not enough to cover the actual increases in the cost of living.  This is just a simple fact, and it’s not an accident, it’s purposefully built into the system. And this decline in purchasing power might shave 20% or 30% off your standard of living over the first 20 years of retirement. If it was tough to live on Social Security early on, it will be brutal after 20 years.”

And inflation is only going to get worse. As Peter Schiff put it in a recent podcast, “The Fed is not going to fight inflation.”

The Fed is going to surrender to inflation. Inflation is going to win. And that means the dollar is going to lose, so gold is going to take off.”

In other words, the purchasing power of your savings and your Social Security check will likely decrease even faster.

This underscores a couple of key points.

1. You can’t count on Social Security to actually secure you a comfortable retirement.
2. You need to plan to protect your wealth from the persistent, insidious erosion of inflation.

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