Why seniors may struggle to meet budgets even with a Social Security COLA boost

Story at a glance

• The Social Security Administration’s 8.7 percent cost-of-living adjustment announced this week marks the highest boost for beneficiaries since 1981.

• Although some lauded the raise, which is automatically adjusted each year, others say it will not be enough for seniors struggling to meet rising costs.

• Certain older populations are more vulnerable to economic instability while inflation rates can vary based on location.

The Social Security Administration’s announcement this week to boost its annual cost-of-living adjustment (COLA) to 8.7 percent means the average retiree can expect to see around $144 more in their monthly checks beginning in 2023.

Though the move was hailed by many who say it will help beneficiaries keep up with rising costs driven by inflation, some seniors — who make up the majority of Social Security recipients — may still struggle to pay living expenses.

That’s because a host of variable factors influence what individuals’ actual take-home pay will be next year, while poverty trends and challenges faced by vulnerable groups could compound cost-of-living unaffordability.

The National Council on Aging (NCOA), a nonprofit advocate for older Americans, deemed the 8.7 percent hike insufficient to meet the growing cost of aging.

“While this increase is historic and needed, it is also inadequate for the millions of older Americans who face skyrocketing housing and health care costs across the country,” said Ramsey Alwin, president and CEO of NCOA in a statement.

“As always, poverty is higher for women and people of color. Many of them had low wages throughout their working lives, which means they have lower Social Security benefits.”

Because $144 marks the average increase, many beneficiaries will receive sums below that amount, while the extra funds could merely off-set high prices leaving some to break-even.

The average Social Security check is also lower for women, thanks to the gender pay gap and a higher proportion of women working in part-time roles.

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Data from July show more than half of older women living alone are poor according to federal poverty standards or don’t have enough money to afford essential expenses. That total is lower for men, at 45 percent.

Last year, those aged 65 and older were the only age group to experience an increase in poverty, according to Census data. In 2020, the rate for this group was measured at 8.9 percent and rose to 10.3 percent in 2021, amounting to one million more people falling below the federal poverty threshold.

“When people are retired, if they do not have much in the way of savings — and quite a large percentage don’t — that can make it very difficult when prices increase and they have nowhere to go to meet those rising costs,” said Mary Johnson, a Social Security and Medicare policy analyst at The Senior Citizens League.

The current inflation rate is the highest many beneficiaries have seen in their lifetimes, Johnson added, though differences in location can also affect to what extent inflation tightens seniors’ purse strings.

Day-to-day expenses

A large proportion of retirees’ Social Security incomes goes toward housing, food and health care costs.

In September, food prices increased by 0.8 percent month-over-month and were up 11.2 percent compared with the same time last year. High grocery costs are already leading many seniors to eat less healthy food, potentially compounding existing health conditions.

In an interview with Changing America, Johnson laid out how rising costs impact seniors on a day-to-day basis.

“We’ve had emails from seniors saying that they have reduced their meals down to one meal a day. They’ve said they were not able to pick up prescriptions because their Social Security had run out and they just didn’t have the funds to go pick them up,” Johnson said.

“We’ve had people report that by not eating or not picking up prescriptions, that they have developed new health problems, consequently, and that has increased their medical expenses that they already had. We’ve had lots and lots of really desperate emails from people who could not afford their rent increases.”

In the United States, over 16 million adults aged 65 and older rely on Social Security benefits to stay above the poverty line, while 42 percent of seniors reside in a household where Social Security accounts for at least half of its income, explained Cristina Martin Firvida, AARP vice president of Government Affairs. For one in five older households, Social Security makes up their entire income.

“[Social Security] is what is making the difference for them between being poor in their old age and not facing that in their final years,” Martin Firvida said.

Health care costs

For seniors also on Medicare, additional financial relief for rising health care costs will come in the form of lower Part B premiums in 2023.

Part B premiums are automatically deducted from Social Security checks, and the low uptake of the expensive, controversial Alzheimer’s drug aduhelm will result in a larger financial cushion for dual Social Security and Medicare beneficiaries next year.

But as more expensive therapies are developed and approved that are intended for conditions common among older individuals, the recurring question of Medicare coverage leaves open the possibility of future premium spikes.

Passage of the Inflation Reduction Act will bring additional relief to seniors struggling with high drug prices. The Act requires Medicare to negotiate with drug companies to lower prices, puts a cap on out-of-pocket drug costs starting in 2025 and a $35 monthly cap on insulin prices beginning in 2023.

“The combination of policies that are coming together right now, for older Americans is going to give them some relief,” said Martin Firvida. However, “there’s still many, many steps going forward that will influence how successful those policies are.”

The policies still need to be phased in while the price negotiations will only affect a limited set of drugs, Johnson said, adding “there’s still a considerable amount of out-of-pocket spending that older Americans will probably have to encounter for prescription drugs.”

Looking ahead

Any increase in take-home pay for seniors thanks to lower premiums and increased Social Security benefits could also push them over taxable income thresholds. Single filers who have a combined income equal to or below $25,000 pay no taxes on their benefits. For joint filers, the threshold is $32,000.

In addition, because the majority of Social Security is funded through income taxes, a looming recession and risk of high unemployment could have ramifications on COLAs down the line, threatening seniors’ economic stability. Following the 2008 recession, no COLAs were paid in 2010 and 2011.

On the flipside, higher benefits paid could move the Social Security insolvency date forward.

For those heavily dependent on Social Security, “this is really still the most important and most stable system that they have in retirement,” Firvida said.

“The most important lens to look through on all of these issues is: how will this feel to the people who live on Social Security, they access their health care through Medicare, they have to make ends meet when they’re retired and they don’t have a work income,” Firvida concluded. “And that’s why we’re going to keep our eye on the ball.”

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