Americans, who lost a combined $1 trillion in 401(k) retirement plans during
the stock-market crash, could each lose another $10,000 in Social Security
benefits as the government fails to give a cost-of-living increase for the first
time in 35 years.
The Social Security Administration this month announced that seniors won’t
receive an annual cost-of-living adjustment, which is linked to inflation, in
their checks next year. The Congressional Budget Office is forecasting no
increase in 2011 either. It’s the first time since 1975 that the benefits won’t
be tied to the Consumer Price Index. The move has been justified because
consumer prices declined 2.1% during the economic recession of the past year.
President Obama has proposed giving Social Security recipients a one-time
payment of $250 to cushion the blow.
As we all know, compound interest acts as a snowball effect for retirement
accounts. It adds a small percentage to principal and layers future interest on
top of the total, repeating the process through the term of the investment. To
put it in perspective, a $1,000 investment earning 10% in compound interest a
year would grow to almost $45,000 after 40 years.
But this multiplying effect also means that even a slight reduction to either
the principal or interest rate looms large over the years. For the average
beneficiary receiving $1,161 a month, it means losing an additional $35 a month.
According to an analysis by the Senior Citizens League (SCL), an advocacy group
with 1.2 million members, the 2010 freeze will reduce benefits by $10,134 during
the course of a 20-year retirement. If there’s no increase in 2011, the loss
would jump to $20,144.
The SCL study says the decrease in benefits will hit seniors hard because
they’ve already lost significant buying power since 2000. Medicare Part B
premiums have more than doubled since then, heating oil has risen 96%, and the
price of a dozen eggs is up 99%. According to the group, 70% of beneficiaries
depend on Social Security for at least half of their income. It’s the sole
source of income for 15%.
“Although President Obama’s call for a payment of $250 will help seniors, it
is a distraction, since the zero cost-of-living allowance will cost retirees
thousands in lost compounding throughout their retirement,” says Shannon Benton,
executive director of the SCL. “Today, a senior can buy just 80% of what they
could have afforded at the beginning of the decade.”
The group is supporting proposed legislative efforts that would restore a 3%
increase to benefits.
Joe Mont is a reporter located in Boston.
