Why Are So Many Social Security Recipients Cutting Back?

Key Points

• The cost of living in the United States continues to rise, with seniors feeling it slightly more than most.

• Sharp Social Security cuts could occur, prompting beneficiaries to save what they can while they can.

• You can take action to curb the impact of rising costs that aren’t being matched by payment increases.

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

America's older residents are dialing back their spending -- at least, that's what a recent Harris poll commissioned by insurer Nationwide indicates. All told, of the survey's 1,812 respondents that are currently receiving Social Security benefits (mostly retirees aged 62 and up), more than half report spending less on discretionary goods and services like travel or dining out this year.

Perhaps even more alarming is that roughly one-third of this crowd also reports spending less on essentials like food or medicine, with a similar proportion saying they've had to dip deeper into retirement savings just to live. At the other end of the spectrum, only 32% of these older Americans say they haven't reduced their spending lately.

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But why?

You probably already know the reason -- everything's just more expensive these days. While July's annualized consumer inflation rate of 2.7% reported by the Bureau of Labor Statistics is nominal, bear in mind that this increase is tacked onto the sky-high price increases seen between the latter half of 2021 and the first half of 2023.

Image source: Getty Images.

Broadly speaking, prices are more than 18% higher than they were just four years ago, and slightly more for Social Security's beneficiaries, who -- largely due to their advanced age -- spend more on healthcare than the average adult considered by the Bureau of Labor Statistics when it calculates inflation. The Consumer Price Index for those aged 62 and up indicates their costs are little more than 19% higher for the same four-year stretch.

Although Social Security's benefits payments have mathematically kept pace with costs, incomes certainly don't seem like they've kept up. There's a reason seniors are cutting back now, after all.

Payment reductions on the horizon

Rising costs may not be the only reason older Americans are dialing back their spending though. Bolstering this decision -- perhaps not even consciously -- is the looming threat of future cuts to Social Security benefits.

Take it with a grain of salt, though. The concern is often highly politicized only for the purpose of political gain. But the oft-repeated warning certainly makes sense in light of the numbers we know, and the ones we can reasonably predict. Per its last look at the present and projected data, the Social Security Board of Trustees fears that in the absence of any immediate changes, come 2034 the program's underlying trust fund will no longer be able to support its intended payments, forcing a 19% reduction in the amounts it's otherwise expected to pay.

This finding jibes with similar outlooks from the National Institute for Retirement Security (or NIRS) and the Congressional Budget Office (CBO), by the way, as well as the Committee for a Responsible Federal Budget (CRFB). So, there's probably something legitimate to the worry just given the sheer degree of unlikely agreement on the matter.

Social Security beneficiaries may simply be saving whatever money they can now, sensing that things could be much tougher in the not-too-distant future even if it's not clear exactly when, or how much tougher.

To this end, Nationwide's survey confirms that 74% of Americans are worried about the program running out of money during their lifetimes, while 61% of the poll's respondents say they expect to continue working indefinitely since Social Security is sooner or later unlikely to pay enough.

Action plan

Are you nervous now? There's nothing wrong with being concerned. Just don't panic, since we tend not to make the best decisions when we do. Take a breath. There are some things you can do to improve your current situation right now, as well as set yourself up for a better unknown future.

1. Pick the low-hanging fruit first

First and foremost, are you making the most of the cash you're leaving parked somewhere for a proverbial rainy day? If it's in a checking account or a bank savings account, you're probably not. Higher-yielding money market funds that are often only offered via brokerage firms or online banks are paying on the order of 4% right now, versus next to nothing with a traditional bank.

These accounts can require a little more work to manage, since you'll need to give specific buy and sell instructions and wait a business day for both kinds of trades to settle. But given their superior returns, they're worth the trouble.

Also take an honest look at your spending. Do you really need cable television in addition to a slew of streaming services that offer more programming than you could ever feasibly watch? As an alternative, antenna-based TV programming is back and more impressive than ever. It's also free, along with a bunch of other ad-supported streaming channels, which is considerably cheaper than cable television is these days.

You get the idea. Most everyone of any age can save on the order of a couple-hundred bucks a month just by scrutinizing every one of their costs. That's all that more than half the country's Social Security recipients are doing at this time.

2. Then dig a little deeper

Surviving rising prices now and potential payment cuts in the future isn't wholly just a matter of culling costs though. You might want (or need) to do something more substantial that makes a bigger positive impact. Seniors paying for a Medicare insurance supplement, for instance, might want to have a sit-down discussion with your agent or broker to see what your options are.

It's also time to take a thorough look at your retirement accounts, and how they're invested. Too much cash? Not enough interest or dividend income? No real growth potential even though you'll need some growth during your retirement? Another sit-down chat with a qualified investment professional might be prudent here.

If you're still working, it also wouldn't be wrong to think about ensuring you have a job if you want or need one past the age you had initially intended to call it quits; it's much more difficult to find meaningfully gainful new employment if you're at or near retirement age. This might even mean a slight step down from your current role, rather than risk being altogether pushed out of a higher one due to corporate downsizing.

In this vein, if you're already retired and would like to earn a little extra income to supplement your Social Security benefits, you may find it easier and more fulfilling to create your own job rather than attempt to find a conventional job you may never actually get. This can include anything and everything from driving for Uber Technologies, making and selling a product, running a flea market booth, substitute teaching, handyman work, or consulting, to name a few ideas.

Just make sure you've got the right skill set, tools, and knowledge to take on any particular role. Also know that earning an income while receiving Social Security benefits can impact the size of your payments.

3. Be willing to think outside the box

Finally, not that you should do all -- or any -- of them, but don't be afraid to consider what some might see as completely wild ideas to keep more of your income -- like moving to a different state! Several states don't impose any income tax on Social Security benefits, or even distributions from retirement accounts. For some retirees, this could mean savings of a few thousand dollars per year. (Just be sure to do a little comparative number-crunching before you make a major move.)

Similarly crazy decisions might include the sale of your one and only vehicle and the use of public transportation, or getting a rent-paying roommate. Nothing should be beyond consideration though, even if you ultimately decide against it.

Doing nothing changes nothing

Bottom line? If you see a potential financial challenge on the near or distant horizon, doing something is always better than doing nothing. Just stay level-headed, and don't rush to make any major decision. Almost every problem has a solution. You just need give it enough time and thought.

With all of that being said, it wouldn't be wrong for all Americans to take an honest look at the political policies that got us into this collective situation in the first place, and remember that when standing at the ballot box.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool has a disclosure policy.