The Social Security Act (SSA) was signed into law by then-President Theodore Roosevelt on August 14th, 1935. In addition to several provisions for the general welfare, the new Act created a social insurance program designed to pay retired workers aged 65 or older, a continuing income after retirement.
As per SSA.gov taxes were collected for the first time in January of 1937, and the first one-time lump-sum payments were made that same month. What many people did not know at the time is the average life expectancy in 1935 for men and women was 59.9 and 63.9 respectively. Roosevelt must have figured few people would live long enough to collect.
Social security is indexed for inflation, which is currently running rampant. It is hard to not notice the prices of goods and services have been rising. Comparing September 2020 to September 2021, for example:
1. Gas has increased an average of 42%
2. Eggs have gone up 35%
3. Bacon had a 28% increase
4. Used or Pre-Owned cars are up 24%
5. Kids shoes up 12%
6. Food on average is up 12% and
7. Furniture is up 11% over the last 12 months
When inflation surges like this, older Americans are the ones who are affected the most. Many seniors are on a fixed income and have their money invested conservatively, such as bank accounts and bank CDs (which I call Certificates of Disappointment!) This time of high inflation and super-low interest rates compounds the problem for many senior retirees.
The good news is that it was just announced that Social Security recipients are slated to receive a 5.9% cost of living adjustment (known as COLA) in 2022! This benefit increase would be the largest in nearly 4 decades.
Based on my 7 examples above, the 5.9% increase will still not be sufficient to offset the skyrocketing increase of goods and services. In addition, there is the federal Social Security tax bite of 50% for individuals earning between $25,000 and $34,000 and 85% for single tax filers earning over $34,000 per year. For joint tax filers, income between $32,000 and $44,000 would pay a 50% tax on your benefits. Couples earning over $44,000, up to 85% of your benefits may be taxable. Certificates of Deposit (CD’s) compound the issue because the taxable interest they earn (even though you don’t withdraw it) counts against your income.
Other than repositioning assets and investments, older Americans have few options to increase their cash flow to absorb price hikes outside of returning to work or increasing hours of employment should they still be working.
See my tips below on options to help you offset inflation eating away at your purse or wallet:
1. Consider Credit Unions or Internet Banks: Both credit unions and internet-only banks will usually pay higher interest rates than brick and mortar banks.
2. Consider Transferring CDs to Fixed Annuities: Fixed annuities (issued by insurance companies) help in 3 ways. They typically offer higher interest rates than CDs. The interest is tax-deferred, which lowers Social Security taxes, and most CD’s allow for a 10% per year no-fee withdrawal. If you withdraw (break) CD money before maturity, you lose ALL of the interest accrued.
3. Consider Selling Your Life Insurance Policy if Not Needed: For older Americans, (especially in poor health) a life insurance settlement could make sense. We have been able to help clients obtain 2-5 times their life insurance cash-values (lump sum with usually no tax) by selling their no longer needed life policy, as well as saving them money they were paying in monthly premiums.
4. Consider a Reverse Home Mortgage: Homeowners could be sitting on an inflation hedge by tapping into their home’s value with a reverse mortgage. This is not for everyone. It is wise to consult with a professional. Homeowners with no mortgage balance could set up monthly payments or a line of credit that can be tapped as needed. Those who are currently making mortgage payments would immediately see a boost in monthly cash flow by refinancing into a reverse mortgage; hence, eliminating their required monthly mortgage loan payments.
A great mentor of mine used to say, “the situation is the boss.” Each situation is different. There are other options like series I-savings bonds too numerous to mention. The worst possible decision is to DO NOTHING!