5 Tips for Social Security Recipients Who Need Way More Than a 1.3% COLA

An elderly couple walk in a park. This photo goes with a story about Social Security announcing recipients are getting a 1.3% raise — and for the average retiree, that means just $20 more per month.
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Social Security recipients will get a raise in 2021 — but for the average retired worker, it will amount to just $20 extra per month.

The Social Security Administration announced a 1.3% cost of living adjustment that will take effect in January 2021. It will be the lowest COLA since 2017, when benefits increased by just 0.3%.

For retired workers, average monthly benefits will rise from $1,523 to $1,543. Disabled workers will see their benefits increase from $1,261 to $1,277 on average.

Why Is the COLA So Low?

For starters, COLAs are never what you’d call generous. From 2010 to 2019, COLAs averaged just 1.52%. The highest increase in the past 10 years came in January 2019, when Social Security benefits rose by 2.8%. In 2015, recipients got no raise whatsoever.

The 2021 COLA is low because inflation is low, at least according to the official definition. Social Security increases are based on price changes as measured by the Consumer Price Index for Urban Wage Earners and Clerical Earners, or CPI-W. The CPI-W surveys households to measure price changes for a basket of goods and services. Social Security compares the CPI-W for the third quarter of the current year (2020) to the CPI-W for the same period in the prior year (2019) to determine next year’s COLA.

But that’s a flawed way to measure the actual costs retirees face. The CPI-W surveys urban workers about what they pay for a basket of goods and services. It excludes households that don’t have anyone in the workforce, i.e., households consisting only of retirees.

A typical urban worker has much different spending patterns than a senior citizen. Retirees, for example, spend a far greater percentage of their incomes on health care than someone who’s still working. But COLAs haven’t kept up with ballooning health care costs.

According to a May 2020 report by the Senior Citizens League, Social Security benefits increased by 53% between January 2000 and January 2020. In the same timeframe, out-of-pocket prescription drug prices for seniors and Medicare Part B premiums rose by 252% and 218% respectively.

What if Your Social Security COLA Isn’t Enough?

If Social Security is your only source of income, rising costs coupled with puny COLAs no doubt sting year after year. But this year’s low COLA will be hard even on seniors with other sources of income.

Interest rates are close to zero, and they’re expected to stay low through 2023. Low interest rates are good for businesses and borrowers, but bad for retirees who depend on fixed interest payments from sources like bonds and CDs.

If this year’s COLA won’t be enough for you in 2021, here are some options to consider.

  • Apply for a Medicare Savings Program. If you have limited income and financial resources, you may be eligible for a Medicare Savings Program that provides state assistance for your premiums. You’ll often automatically qualify for extra help paying for Medicare drug coverage if you’re eligible for one of these programs.
  • Find additional benefits you may be eligible for. Go to benefits.gov and fill out a questionnaire to determine whether you’re eligible for other forms of aid. For example, you may qualify for SNAP benefits to help with groceries or an energy assistance program.
  • Practice extreme cost-cutting. We get it: If Social Security is your main source of income, you’re not splurging on lobster and caviar. But you may need to slash your budget even further, say, by going to a food pantry to save on groceries or giving up your car.
  • Work part time. Working just a few hours a week could make a big difference if you’re on a Social Security income. More companies are allowing employees to work remotely, so check out our work-from-home jobs portal for opportunities. Just be aware that if you’re working and taking benefits before full retirement age, your benefits can be reduced by up to $1 for every $2 you earn above $18,960 in 2021.
  • Consider a reverse mortgage. If you own your home and have significant equity, a reverse mortgage may be worth considering. You’ll still be responsible for the home’s property taxes and insurance, plus any homeowner association fees, so it’s only an option if you’re confident you can afford these costs.

A Word of Warning for Future Social Security Recipients

If you have yet to start collecting benefits, take a few minutes to use the Social Security Administration’s benefits estimator to see how much you’ll be eligible for. It’s also worth reviewing the recent history of COLAs to see just how little those benefits will go up each year.

Does that monthly payment look like enough to survive on? Nope. Didn’t think so.

That’s why it’s essential that you save for your own retirement by contributing to a 401(k) plan if your employer offers one and/or funding a Roth IRA or traditional IRA. Social Security will only replace about 38% of income for a worker earning average wages who retires in 2020 at 65. Retirees can also expect Medicare premiums and health care costs to eat up a larger chunk of their budgets year after year.

With Social Security, it pays to wait. Your benefits are reduced by five-ninths of 1% for every month you claim before full retirement age. If you were born in 1960 or later, your lifetime benefits will be one-third lower if you started taking them at age 62 than they would be if you waited until 67. For each year you delay beyond full retirement age, you get an extra 8% until age 70.

Granted, not everyone will be able to wait until they’re 70 to start Social Security benefits. Many older workers are forced to retire early due to circumstances they can’t control, like medical issues, a job loss or a spouse’s ailing health. But waiting as long as possible is perhaps the best thing to do to ensure your Social Security checks stretch far enough when you retire.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].