Soaring inflation rates are eroding the purchasing power of retiree pensions. This is alarming news for seniors who solely rely on their lifetime pensions for their daily needs. Unlike social security, most retiree pensions do not keep up with inflation rates.
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Soaring Inflation is Wrecking Retiree Pensions
Usually, pensions receive cost-of-living adjustments (COLA) to keep with the rise in the price of goods and services. However, these COLA rates are usually small at up to 5%.
In some cases like corporate pensions, these don’t offer COLA increases. Now, inflation rates are hovering at 8.5% last March.
Many pensions periodically increase recipients’ payment amounts by offering a cost-of-living adjustment. But those raises are small relative to the 8.5% annual inflation rate in March, the highest in over 40 years.
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Even with regular COLA adjustments, the purchasing power of retiree pensions is taking a hit from overly high inflation rates.
The Higher The Inflation Rate, The Lower The Pension Value
Jean-Pierre Aubry, associate director at the Boston College’s Center for Retirement Research sums up the situation nicely.
Retiree pensions’ value will go down substantially due to inflation. “The real value of that pension will go down. It will basically buy less at the supermarket than it used to,” he said.
The National Association of State Retirement Administrators gave an example of the declining value of retiree pensions due to inflation.
A 1% inflation rate will reduce a $25,000 annual pension’s value to $20,488 after 20 years. Meanwhile, a 2% inflation rate would erode its original value by 33% to $16,690.
Bad News For Senior Citizen Retirees
Seniors who rely on pensions for their daily needs will realize their money will buy fewer goods by the day. Some pensioners, like those who collect from Social Security, can heave a sigh of relief as payments try to keep pace with inflation. However, most employer pensions do not have this mechanism.
Unfortunately for all, it remains unclear how long high inflation will persist in the US. Many analysts see inflation already peaked in March and is only downhill from there. Others think that inflation will remain high until the end of the year.
State and Local Government Pensioners In Danger
The diminishing value of retiree pensions will have a major effect on former state and local government workers.
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There are nearly 11.5 million retired government workers, public school teachers, firefighters, and police officers collecting pensions. Soon, they will realize that their hard-earned pensions are now worth much less.
According to the National Association of State Retirement Administrators, around 75% of state pensions provide a COLA to recipients.
However, the rates won’t likely be close to the current 8.5% inflation rate. Most pensions place a cap on COLA to around 5%, if not lower.
This means that even with the cost of living adjustments, retiree pensions will still have less purchasing power.
Keith Brainard, research director at the National Association of State Retirement Administrators said that caps are much lower. .“Very few plans provide much more than 2% or 3% [a year],” he said.
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What do you think of inflation possibly wrecking the income of retirees? Also, how long do you think high inflation will last?
Let us know what you think. Share your thoughts in the comments section below.