In 2019, Social Security benefits received a 2.8% increase – the largest since 2012. But in 2020, benefits will only see a 1.6% increase. Even though inflation is low right now, the cumulative effect of inflation has eroded the buying power of Social Security by a third since 2000 according to the Senior Citizens League. It remains to be seen whether this trend will continue, despite increased Social Security taxes. In the meantime, prepare for the possibility that inflation will erode your Social Security benefit’s buying power.
If you’re still working, the amount of your earnings subject to Social Security might rise in 2020. This is just one change to Social Security. The maximum amount of earnings subject to the Social Security tax will rise 3.6% to $137,700 next year. This increase is based on the Consumer Price Index, which measures wage growth to determine annual increases. But despite this tax increase, Social Security benefits may not increase as much as you would expect.
In fact, the Senior Citizens League estimates that the average Social Security benefit has lost a third of its buying power since 2000. This is largely because benefit increases have not kept up with the increasing cost of prescriptions drugs, food and housing. Expenses for Social Security beneficiaries have risen twice as fast as the yearly cost-of-living adjustment (COLA) since 2000, despite relatively low inflation rates. And in some years, the COLA adjustment has been as low at 0.3% for 2016, and even 0% for 2015.
What can you do about this? One way to help combat Social Security’s decreased buying power is to pursue a Social Security maximization strategy. This involves choosing the right age to claim benefits, deciding whether or not to claim a spousal benefit, and minimizing taxes on benefits. Despite Social Security’s decrease buying power, it remains an important piece of the retirement puzzle because it offers a steady source of lifetime income. So, it’s worth pursuing a strategy to maximize what is owed to you.
We help our clients with Social Security maximizations strategies and consider the long-term effects of inflation on retirement savings and income. Even a modest inflation rate can eat away at the buying power of your Social Security benefit and savings over the course of a 30 plus year retirement. If you’re interested in a retirement plan that takes this into account, the professionals at ILG Financial can help. To meet with us, sign up for a no cost, no obligation financial review.