Last Updated: October 18, 2010
The news released in a matter-of-fact, almost unsympathetic manner. The Social Security Administration (SSA) simply said that “monthly Social Security and Supplemental Security Income (SSI) benefits for more than 58 million Americans will not automatically increase in 2011.”
According to a release, “the Social Security Act provides for an automatic increase in Social Security and SSI benefits if there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a cost-of-living adjustment (COLA) was determined to the third quarter of the current year.”
And, as determined by the Bureau of Labor Statistics, there was no increase in the CPI-W from the third quarter of 2008, the last year a COLA was determined, to the third quarter of 2010. “Therefore, under existing law, there can be no COLA in 2011,” the SSA said in its release.
In addition the SSA said: “Other changes that would normally take effect based on changes in the national average wage index also will not take effect in January 2011. Since there is no COLA, the statute also prohibits a change in the maximum amount of earnings subject to the Social Security tax as well as the retirement earnings test exempt amounts. These amounts will remain unchanged in 2011.”
Learn more about the 2011 Social Security and SSI changes.
In light of that news, members of the Financial Planning Association® (FPA®) offered the following guidance to seniors who are trying to put the news in perspective.
No COLA Means No Inflation
“Everybody likes a raise, but seniors should view this as a good thing,” said FPA member John Comer, CFP®, of Comer Consulting and a contributor to FPA’s All Things Financial Planning Blog. “If there is no COLA adjustment for people on Social Security, there is no increase in their costs — as it is measured by the Social Security Administration. If those seniors are not living entirely on Social Security but have savings and pensions, they should be extremely happy that their costs are not going up.”
Others agree. “The media has spun this story as if this is a great injustice to seniors,” said FPA member Richard S. Kahler, MS, CFP®, ChFC®, CCIM, of Kahler Financial Group. “Very few media outlets are explaining the reason there is no increase is because we’ve not had inflation. And, if we slide into deflation, we will need to be cutting Social Security checks.”
“There is no difference in a five percent increase with five percent inflation, a zero percent increase with zero percent inflation, or a two percent cut with two percent deflation,” Kahler said. “Purchasing power remains exactly the same in all three scenarios. Unfortunately, given these three scenarios, most people would feel they are getting something with a five percent raise and five percent inflation and most would be outraged if their checks were cut two percent with two percent deflation.”
No Need to “Plunder” Your Savings
There’s been a concern that seniors might start “plundering” their savings given that that there will be no COLA in 2011. But some planners suggest that such reports are more hype than reality.
“Let’s put this in perspective of what could have been,” said FPA member Frank St. Onge, CFP®, and a contributor to FPA’s All Things Financial Planning Blog. “Assume a beneficiary was getting the maximum of about $2,500 per month. If inflation would have been four percent, the beneficiary would have gotten about $100 more per month for next year. The average beneficiary gets $14,000 per year, or about $1,200 per month. That would be an increase of $48 per month on average.”
“So how do we get to ‘plundering’ our portfolios when we might have to take $48 to $100 more per month out of our portfolio?” St. Onge asked.
For his part, St. Onge suggests that seniors and others would be well served to react to the news with calmness rather than hysteria. “I am not suggesting that there should be no concern for the seniors, but ‘plundering’ our portfolio?” he asked.
No inflation as measured by the CPI-W doesn’t mean that expenses aren’t rising for seniors or that they shouldn’t look for ways to cut expenses.
For instance, FPA member Candace G. Kaplan CFP®, RHU, ChFC, suggests that drug costs, medical expenses, and fuel and energy costs are rising and that many seniors struggle to pay their bills.
Given that, financial planners are suggesting that seniors should examine their budget or create one. “If you haven’t put together a monthly budget in the past, now is the time to do so,” said FPA member Scott M. Kahan, CFP®, president and wealth manager of Financial Asset Management Corp. “Be realistic and look at areas where you can cut back.”
For his part, FPA member Robert Schmansky, CFP®, of Northern Financial Advisers and a contributor to FPA’s All Things Financial Planning Blog said seniors ought to discuss their budget with their financial adviser and see if they have any ideas. “Advisers are not only expert financial counselors, they are also business people interested in minimizing their overhead,” said Schmansky. “They often have creative ideas or knowledge about new services, like the Groupon pop-up, that offer ways to stretch your budget.”
Seniors should look for ways to “scrub” their fixed and discretionary expenses. “Items that individually may seem small can amount to real savings when combined,” said FPA member Leslie Beck, CFP®, of Compass Wealth Management.
For example, Beck said the Lifeline cell phone service provides free cell phones to those who meet certain income restrictions. “Dropping current cell phone or landline coverage and replacing it with a free (or even prepaid) cell phone can save a senior hundreds of dollars,” she said.
In addition, Beck suggested that seniors should check their cable bills for unnecessary charges, such as packages little used, extra cable box charges for televisions in spare rooms, and the like. “We're not talking about cutting back here,” Beck said. “Just looking at what you really use and how you pay for it.”
Seniors can also look to cut back on discretionary expenses, such as travel, gifts and giving. “With travel, it pays to shop carefully and plan well in advance,” said Kahan. “You may be able to negotiate better deals with cruise lines and other travel providers. Look for group plans that may be cheaper.”
Seniors might also look at ways to cut what are viewed as necessary expenses, such as medical. “Sometimes veterans are eligible for medical services, including prescriptions, through the Veterans Administration,” said Kahan.
Beck suggested that seniors should also make sure they are enrolled in every senior savings program they can be part of. “For example, many states allow seniors to ‘freeze’ their property tax levels, saving them from that annual increase,” Beck said. “Low-income seniors should check to see if their states offer subsidized prescription programs, such as PADD in New Jersey, which can be used with Medicare and will reduce prescription co-pays.”
Asking children and grandchildren about money-saving technology could help cut costs, too. “Your children and grandchildren are also great places to look for advice on new technology like Skype, which can save you money on phone bills,” said Schmansky.
Besides cutting expenses, seniors should also consider ways they can raise their incomes. One financial planner framed it this way: “The average Social Security benefit in 2008 was $1,153,” said FPA member Scott Hughes, CFP®, of Hughes Financial Services, a branch office of WFG Investments, Inc. (Securities offered through WFG Investments) “The historical cost-of-living adjustment is 2.8 percent. If no COLA is going to make your finances tough, try to find a way to save $35-$50 a month to provide yourself with that small boost in income.”
Hughes said it’s important to consider all income sources — those currently being received and those that perhaps have not been tapped. “If you have certificate of deposits (CDs) or other investments, consider having the interest paid to you,” Hughes said. “If you have investments where the dividends are being reinvested, consider having those dividends sent to you monthly or quarterly. If you need more income see if your portfolio can be rebalanced in a way that you could take advantage of higher income paying investments such as bonds, real estate investment trusts (REITS), and dividend-paying stocks. Take note that doing so can add some volatility to your principal.”
Schmansky also suggested that seniors should talk to their adviser to determine the withdrawal needs from their portfolio, and review if their portfolio is structured appropriately.
One planner suggested you closely examine your expenses before you go adjusting your portfolio or increasing your withdrawals. “Be skeptical of your actual expenses,” said FPA member Jason K. Branning, CFP®, of Branning Wealth Management, LLC. “Ask yourself if you actually — not what you think — need an increase next year and if so for what things? Prove to yourself why you need the increase. Is it due to actual increases in medical or long-term care insurance premiums? Are you actually spending more in the grocery store and at the fuel pump? If you determine you do need more income, then examine your assets.”
As with Hughes and Schmansky, Branning said boosting income from assets is possible. But he suggested evaluating all your assets as part of this exercise. “Assets are the things you own like savings, retirement plans, your human capital (the ability to produce income if health permits), your house and land,” Branning said. “Can any of these assets be used to increase your income to cover your necessary expenses? Use only the assets you need to use, and where possible, pensionize them — turn them into an on-going stream of income.”
For her part, Beck suggested other non-traditional ways of boosting income. “Doing things such as holding garage sales, selling items online, and the like can raise thousands of dollars, while saving heirs the headache of having to sort through mom and dad's lifetime accumulation of possessions,” Beck said.
In extreme cases, Kaplan suggested that seniors might have to depend on the generosity of family and community for help meeting their expenses, especially when those costs are already cut to the bone. “This will have to continue to bridge the gaps for most seniors,” Kaplan said.
Return to Work
FPA member Eric Toya, CFP®, vice president of wealth management at Trovena, LLC, also suggested that returning to work might be yet another way to boost income. “If you are able to return to work, even part-time, it may help bridge the gap in a year like this, when there is no increase in benefits,” Toya said.
Toya noted that any earnings seniors are able to generate have the potential of pulling double duty. “Obviously, any earnings will help current cash flow,” Toya said. “However, your earnings may also increase your Social Security benefits as Social Security automatically recomputes the benefit amount after the additional earnings are credited to your record. Remember, your benefits are based on your highest 35 earning years. While a part-time income may not seem significant compared to your later full-time working years, it is possible that you will surpass your earnings from 34 and 35 years ago.”
Learn more about the effects of part-time work.
Put Social Security in Its Place
The recent announcement by Social Security that there will be no increase in benefit payments for the second year in a row brings up many, critical issues surrounding Social Security, one of which is this: “Social Security should not be considered a ‘retirement plan’,” said FPA member David R. Bergmann, CFP®, EA, CLU, CHFC and a contributor to FPA’s All Things Financial Planning Blog. “Social Security needs to be recognized, because we cannot afford it to be more, as that ‘social’ safety net providing some ‘security’ for basic subsistence. We shouldn’t be thinking of it as a lifestyle support mechanism.”
The lack of a COLA underscores the need for Americans to not depend solely on Social Security for income in retirement. In fact, Bergman said it highlights the need to “save early, and save often.”
Of note, seniors and others interested in saving Social Security should visit FPA’s Social Security Predictor, a web tool that allows you to compute your benefits based on your age and current projections for the future funding of the system.