The federal government recently announced that Social Security payments will increase in 2015 for the nearly 60 million Americans receiving benefits. The bad news is that the 1.7 percent cost of living adjustment or COLA amounts to an increase of only $20 per month for the average Social Security recipient. While any increase is certainly welcome, the concern is that the small jump in benefits simply will not keep up with the increased cost of living for the average retiree.
Since many retirees spend a disproportionately large percentage of their income on health care (one expense that tends to rise each year), the federal government’s methodology for calculating the COLA has also come into question. The purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income or SSI benefits is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers or CPI-W from the third quarter of the last year a COLA was determined to the third quarter of the current year. If there is no increase, there can be no COLA. This index is published by the Bureau of Labor Statistics. If there is no increase in the CPI-W index, there will not be a COLA adjustment.
Unfortunately, there have recently been years without any increase. For example, 2010 & 2011 saw no increase in benefits. Additionally, many politicians have recommended a new approach to calculating inflation that may result in reduced COLAs in the future. This chained CPI approach was suggested as one way to improve the long-term solvency of Social Security.
While it may or may not be implemented, most changes to shore up Social Security involve delaying benefits for younger workers while increasing taxes on higher wage earners. In fact, the cap on wages will also increase next year. Social Security benefits are paid for by a 12.4 percent payroll tax (6.2 percent is paid by the worker with the other half paid by the employer) on the first $117,000 of employment income in 2014. This cap on wages will also increase in 2015 to $118,500, resulting in additional taxes paid by higher income earners.
With questions about how future benefits will be calculated and only incremental increases in Social Security, retirees who rely on these benefits as the cornerstone of their retirement plan have become discouraged. Just how important is Social Security for the average retiree? According to Census statistics analyzed by the AARP Public Policy Institute, “almost half of retirees relied on Social Security for 50 percent or more of their family income, while nearly one in four relied on Social Security for 90 percent or more of their family income.” Additionally, many seniors have been forced to extend their careers into their late 60s and 70s just to get by.
These statistics highlight an important concept: Social Security alone may not sufficiently meet the retirement income needs for the average retiree and it is critical to have a plan B. For example, according to the Employee Benefits Research Institute, nearly 66 percent of retirees have less than $50,000 saved for retirement (excluding their home or defined benefit pension plan). Only 27 percent of retirees have saved $100,000 or more.
For pre-retirees who still have time: Make planning for the future a priority for today. Building a retirement nest egg to augment Social Security income may be the only way to ensure that future income will meet their needs. Remember, Americans are living longer than ever before. For instance, According to the SSA, the life expectancy of a 65-year-old in 1940 was almost 14 years; today it is about 20 years.
It is also important to note that fewer and fewer retirees have access to a pension. For most workers, the responsibility to plan for the future cannot be overlooked or delayed. The sooner pre-retirees begin to address these challenges the better. From 401(k)s to 403(b)s, workers need to take full advantage of any and all plans available. Speak to your HR department, ask questions and educate yourself on the benefits available. For those without accessibility to a defined contribution plan through work, other plans must be made. Consider taking advantage of IRAs or non-retirement investment accounts to help build the additional savings required.
While Social Security can serve as one leg of your retirement income stool, be sure to plan for and build supplemental income resources. This may help to reduce the frustration that comes from paltry monthly increases in Social Security benefits. Consider visiting www.ssa.gov to learn more about the upcoming changes to benefits in 2015. Since everyone’s situation is unique, consider speaking to your tax and financial adviser to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.