Are Social Security Benefits Keeping Up With What Retirees Actually Need?

Key Points

• Social Security benefits are not keeping up with rising prices.

• The majority of Social Security benefits recipients have had to cut back on spending.

• Benefits aren't keeping pace with what retirees need because they don't accurately measure inflation.

• The $23,760 Social Security bonus most retirees completely overlook ›

Social Security provides a consistent lifetime income for retirees, and many seniors rely on these benefits to help them cover the basics. Unfortunately, benefits aren't really doing that as well as they should.

While Social Security was never meant to be a sole source of retirement income, there are supposed to be systems built into it to make sure that benefits don't lose buying power over time. That's critical so seniors don't see their quality of life erode as retirees.

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Unfortunately, a new study from Nationwide Financial shows that benefits may actually be losing ground, and retirees have had to make big cutbacks because of it. Here's what the study shows, along with some details about why many retirees are struggling with too little retirement income.

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Retirees say their benefits are falling short

According to the Nationwide Financial research, 52% of current Social Security benefit recipients say they have had to cut back on their discretionary spending as a result of the fact that increases in living costs are outpacing Social Security benefit increases.

In other words, the annual Social Security COLA is not doing its job. Retirees are seeing the value of their benefits fall, and it's causing a serious financial strain.

It's not just cutting back on discretionary spending, either. Nationwide Financial highlighted changes other seniors are making, including:

• Reducing spending on essentials, including groceries and medications (31% are doing that)
• Relying more on savings or retirement plans to cover costs instead of Social Security (29%)
• Downsizing their living situations (18%)
• Taking on part-time work or looking for other ways to increase income (15%)

Obviously, some of these steps are drastic changes -- but even giving up discretionary spending is not something most people imagined themselves doing during the retirement planning process.

Why are Social Security benefits falling so short?

Social Security benefits are not helping seniors keep up with their rising costs because benefits aren't going up fast enough to account for the inflation that retirees are actually experiencing.

The formula that is used to calculate COLAs bases retirees' annual raise on year-over-year changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Given that the CPI-W tracks the spending patterns of a very different group of people than retirees, it's not a surprise this formula ends up shortchanging seniors. Older Americans generally spend more money on things that see above-average inflation, including medical care and housing expenses, and they devote less of their income to some of the other things urban clerical workers buy.

This flaw in the COLA formula has led to warnings from the Senior Citizens League (a senior advocacy group) about benefits losing around 20% of buying power since 2020.

Since benefits have not been keeping pace with price increases, and retirees have been coping with above-average inflation in the post-pandemic era, it's not a surprise that so many seniors are telling Nationwide that they've had to cut back.

What can you do if you're struggling?

Retirees who said they are spending less due to benefits losing buying power are, unfortunately, handling this difficult situation in one of the best ways available to them.

While reducing your spending isn't fun, you do not want to raid your 401(k) or otherwise empty out your retirement accounts too fast because then you'll find yourself really struggling later, as you can't live on Social Security alone.

Finding ways to reduce spending a little bit over time can be better than draining your accounts to try to maintain your standard of living, only to find yourself suddenly broke late in life. So, seniors need to keep looking at their budgets and finding those cuts -- ideally without sacrificing their health by giving up things like medications.

Those who are struggling can also look into what other sources of help are out there, as additional government benefits like SNAP and Medicaid could help those having a hard time making ends meet.

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