Inflation in retirement: What you can do to keep up

popular plans will see double-digit increases. That’s a big change from recent years–average premiums for the top 10 plans have been flat or down a bit in each of the past four years.

TSCL Cost of LivingInflation’s impact on seniors isn’t limited to healthcare. Social Security beneficiaries have lost 22% of their buying power since 2000, according to a study by the Senior Citizens League (TSCL). The study examined prices of key consumer goods and services typically bought by seniors from 2000 to January 2015. Of 34 items measured, 22 exceeded the amount of increase in the COLA over the same period (see chart showing selected items from the study). The TSCL survey found that the COLA has increased benefits 43% since 2000, while typical senior expenses have jumped 74%.

Numbers like these underscore why it would be a bad idea to revise the COLA formula to award smaller increases–an idea that has been pushed by some Republican legislators and presidential candidates, and was embraced (briefly) by President Obama. This would be done by adopting a “chained CPI.” This alternate measure is based on an economic theory that the CPI-W overstates inflation because it fails to account for the substitution that consumers make when the price of a particular product or service gets too expensive.

The chained index attempts to reflect these substitutions. The theory is that a spike in gasoline prices will prompt consumers to spend less on fuel, perhaps more on food, and so on.

The initial impact of a chained CPI looks small–the Social Security Administration estimates it would reduce the COLAs by 0.3% annually. But with compounding, its effects would grow over time. With an average monthly Social Security retirement benefit this year of just $1,270, even small cuts would be painful for many seniors.

Also worth noting: low or zero COLAs don’t only cut into benefits for current enrollees, they also cut into future benefits for people who are eligible for benefits (ages 62 to 70) but haven’t yet filed. When you delay taking benefits until a later age–say, full retirement age (66)–you get full benefits increased by the COLAs awarded for the intervening years.

Planning for Inflation

What can you do to hedge against the negative effects of future inflation in retirement?

Work longer. Additional years of work can fund living expenses while you delay your Social Security filing; that not only boosts your monthly benefits by approximately 8% when you do claim, but COLAs awarded during the interim (from age 62) will be added to your benefit.
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