Social Security: How does inflation affect benefits?

In the year 2022 surged the highest increase in the last 40 years, in the amount that retirees receive by Social Security in the United States.

Bequeathing to the figure of 5.9% and by 2023 some analysts point out that the increase could exceed 8%.

Thus, approaching one of the highest amounts of increases in the history of these benefits.

It was recorded in 1981 when it reached 11.2% (source: Fox Business).

In this article we will briefly share the following ideas:

1. How are these increases calculated?
2. It will be that they are enough.
3. The particularities of this benefit for those who are immigrants and why you should not lower your guard.

A retirement benefit that is adjusted annually for inflation is a wonderful thing, but we must look at these numbers with great care.

For 2022 the average increase in profit was $ 92 per month, this being an amount that  will not allow you to get out of your financial problems.

Now, we must remember that, since his birth in 1935, President Roosevelt said it clearly and his words make even more sense today:

“We will never be able to insure one hundred percent of the population against one hundred percent of the dangers and vicissitudes of life, but we have tried to frame a law that will give some measure of protection to the average citizen and his family against the loss of work and against poverty in old age.”

(Source:  ssa.gov, President Roosevelt).

Since 1935 he had already been telling us that it was a partial aid, not that with that amount we would have an independent retirement.

Therefore it is striking that most are confused and feel that with this benefit they will not have financial problems.

In the statistics published by Social Security, we see that for every 4 Americans retired 1 depends on more than 90% of this benefit.

And more than half of those consulted say that the payment of this pension is more than 50%.”

 And if you find these figures alarming, in our Latino community the numbers are even worse.

Depending on all this, it is important that you know more about these benefits and their characteristics:

1.- The amount to be received for withdrawal is adjusted for inflation, but how do you calculate it?

For Latin Americans, we know firsthand the destructive effect that inflation has on the budget of families.

And how money that was no longer enough disappears even faster when inflation is high.

Every year Social Security takes a price index called (Consumer Price Index for Urban Wage Earners and Clerical Workers – CPI W) that tries to show the variations of the products and services consumed by salaried and urban administrative workers, hence the famous number of the COLA (Cost-of-Living-Adjustment) is generated, which is nothing more than the percentage that will be used to modify the amount that retirees receive.

If the COLA tests positive they will raise the monthly amount by that amount, but if it does not move or come down, rest assured that they will not reduce the amount you receive monthly, but it will not be adjusted and ready.

Now, if we wanted to go deeper into this calculation: it is only the third quarter of each year and it is compared with that same period last year.

However, if the beginning of the year had a very high monthly inflation and then low, the COLA would not take this impact, as well as if it happens the other way around and just in those months inflation was higher for that period the result would be better.

This methodology is criticized pointing out that instead of using the CPI-W, it is for active workers an index for retirees should be used considering that their consumption parameters are different from those of a worker in the middle of the working period.

What is very true, and we must take it into account is that by the time they are going to make the increase in this benefit that occurs only at the beginning of each year, surely inflation is eating the purchasing power of the amount you will receive monthly.

 Prices do not wait, but in times of high inflation they are given continuously, and it is a factor that you must take into account for your budget.

2.- For immigrant Latinos, the story is even more complex for Social Security

We all know that migration is complex, it has benefits, but it also has challenges that we must overcome.

To receive the Social Security retirement benefit, you need to have contributed for about 10 years earning the minimum amount stipulated to accumulate 40 credits that you will need to earn the right to this pension. 

With which many may feel that the work is done, but the complex is not there but in the way the amount you will be paid monthly is calculated:

The formula takes into consideration the salary you earned during the last 35 years and since many immigrants do not have so many years working in the United States.

will make the amount you will receive as payment less than the average monthly checks.

According to Bankrate stands at $ 1,536 by 2022, unless your salary has always been very high, which is not common when you arrive in a new country.

So, what should those who don’t want to be in poverty do during their retirement

First, understand that there is no magic solution and as we saw the amount you will receive for this retirement will be an important help, but it is not salvation. 

It is there that everyone should start working as soon as possible to create their own retirement fund, where we suggest using the following tools:

A.- Have a 401K or IRA account

As we have mentioned the challenge is great and you must help yourself in all possible ways.

The best thing for this is a retirement account, where the return produced by your investments can grow without paying taxes, which will allow you to potentiate this growth. 

If your employer or company where you work offers you a 401K account, we suggest that you take it and try to contribute as much as possible which in many plans will make the company also give you an additional contribution to the one you are going to give.

Likewise, IRA (Individual Retirement Account) accounts are an excellent option for those who do not have access to 401K plans or simply have it, but can contribute more, for the year 2022 the maximum annual contribution is $ 6,000 and $ 7,000 if you are over 50 years old, and in the same way it has tax benefits so that your money grows without paying tax while it is in these accounts.

It is always important to consult with a specialist or financial advisor to have all the details of these accounts.

B.- In the face of inflation, the bank account is not the solution

We all know that millionaires don’t get rich by having the money in their bank accounts.

If you invest it so that it grows over time, this reality becomes even more valid currently.

There are many people who tell me: “the stock market is very scary for me” to which and respond:

“It’s scarier that your money in the bank account goes down every day, but you don’t realize it”

At least the stock market moves up and down , but over the years stock investments have proven to be one of the assets that has beaten inflation.

Note: Past performance is no guarantee of future results

This is where a diversified and low-cost portfolio will be a fundamental tool, which you should review with a specialist to determine your level of risk and the combination of bonds and stocks that best fits your investor profile.

In the same way you must contribute a part of your income for these investments, being of course greater the challenge for those who are not so young, having to contribute a greater percentage to reach your goal.

C.- Fundamental to know what the goal is and how to reach it

Perhaps many of you reading this information will say well I have to get to work in my retirement, since we already saw that Social Security although it is going to be indexed for inflation is not the solution, but your first question should be:

How much do I have to contribute month by month to reach my goal? and What is the goal amount to have an independent retirement?

There are two ways to answer this question, for those who prefer to do it alone, there are multiple withdrawal calculators on Google that you can consult and have a very general idea of the amount you might need. 

But undoubtedly, the most recommended solution is to hire a Financial Planner to make a diagnosis of your current finances, jointly paint the proposed goals and give you a written document with the detail of the financial plan you must follow and the actions you must take today to reach your goal.

It is always important when choosing a financial planner, who is duly certified and can go through this Link to the PAGE OF THE CFP Board, where you can choose the one that best suits you: https://www.letsmakeaplan.org/

We hope that this information is useful and has allowed you to know more about this benefit for your financial independence in retirement.

Alonso Rodríguez Segarra

Founder & CEO Advise Financial

advise-financial.com

Alonso is a “CERTIFIED FINANCIAL PLANNER™” who is dedicated to increasing the Financial Well-being of nurses, physicians and successful immigrants in Florida and Texas. With more than 20 years of experience in the world of finance, always working for the best interest of his clients, under fiduciary criteria.