Understanding the Problem of Reduced Spending Power

According to a survey released in May 2013 by The Senior Citizens League, seniors lost 31% of their buying power since 2000. In terms of monthly outlays, the typical household in 2013 composed of individuals over the age of 65 would only have 69% of the available income to pay for necessities and other items as opposed to a household in 2000 which would have had 100% of equivalent income for outlays. Comparable surveys in recent years reveal the same problem of reduced income for the elderly.

According to Larry Hyland, president of the organization, "This survey illustrates why budget proposals that would cut the growth of COLAs would put millions of older and disabled Americans at risk of insufficient income to cover more growing expenses," "to put it in perspective, for every $100 worth of expenses seniors could afford in 2000, they can afford just $69 today (2013)," Hyland adds.

A senior with the average Social Security benefit in 2000 received $816 per month, a figure that rose to $1,129.80 by 2013. However, that senior would require a Social Security benefit of $1,477.00 per month in 2013 just to maintain his or her 2000 buying power.

The study examined the increase in costs of 32 key items between 2000 and January 2013. The items were chosen because they are typical of the costs seniors must bear. Of the 32 costs analyzed, 20 exceeded the COLA. The selected items represent eight categories, weighted by approximate expenditure.

According to the Census Bureau, a majority of the 54 million senior and disabled Americans who receive Social Security depend on it for at least 50 percent of their total income, and one in three beneficiaries rely on it for 90 percent or more of their total income.

Cost of Medical Care Reduces Available Income

It should be noted that Social Security cost-of-living increases are tied to the CPI which is in turn based on the cost of a market basket of goods and services used by the average consumer in the United States. CPI surveys are done on a routine basis and the increase in the CPI from year-to-year is used as one measure of inflation. This should mean that Social Security income should be keeping pace with the cost of inflation since Social Security cost-of-living is based on what is considered the standard measure for inflation in this country.

Unfortunately, seniors typically consume much more healthcare than the average American and therefore healthcare should be weighted more heavily if the CPI were to apply solely to seniors. The cost of healthcare has been increasing significantly faster than the CPI over the past 20 years. It is likely that healthcare, which includes prescription drugs, is one major culprit that is eating into the buying power of senior's incomes. A principal reason why health care spending is has a greater impact among the elderly is that a much higher proportion of the elderly than the non-elderly has expensive chronic conditions.

A report, which appears in the Journal of General Internal Medicine, looked at data from more than 3,000 people covered by Medicare in 2002-2008 to gauge the impact of health care cost on seniors. Researchers measured how much Medicare-eligible seniors had spent out of pocket on healthcare in their last five years alive and looked at how those costs weighed on their total household income.

After crunching the numbers, the report found that during that time, more than 75 percent of Medicare-eligible households spent at least $10,000 out of pocket on health care. Spending for all participants during those last 6 years averaged $38,688, and for the remaining 25 percent the average expense was even greater: they spent a whopping $101,791 out of pocket. A quarter of participants also spent "more than their total household assets on healthcare," according to the report.

It isn't just medical services that are eating into the buying power of seniors. A report from the AARP's Public Policy Institute says the prices of drugs used most often by older Americans went up by nearly 26% from 2005 to 2009. The rate was almost twice that of inflation, which was 13% over that period of time. In 2009, drug prices rose 4.8% even though the inflation rate was -0.3%.

"At a time when our country is contracting economically and inflation is really, really low, inflation in the cost of prescription drugs is going in the other direction," Cheryl Matheis, senior vice president for policy strategy at AARP, told The New York Times. "The word we use is relentless because it just doesn't seem to abate."

After examining the retail prices of the 514 brand name and generic drugs used by Medicare recipients, AARP analysts found that the price of the 185 generic drugs fell by nearly 31% over the four-year period under study. During that same time, prices of 217 brand-name drug rose by nearly 41% and the price of the 112 specialty drugs studied leaped more than 48%.

Growing Problem of Elder Debt Reducing Available Income

The amount of debt held by seniors seems to be growing every year. The bulk of this debt is in the form of home equity mortgages and credit cards. Undoubtedly some of this debt is due to escalating medical costs, but it also may be due to other factors such as a poor economy causing seniors to lose employment or extremely dismal returns on savings and investments. It also appears that many older employees are carrying a substantial debt into retirement. The stigma of debt is not as great for older individuals as it once was. It takes income to make debt payments. That in turn reduces the amount of available income for other necessary household maintenance.

Here are some facts concerning senior debt.

The median level of debt among households led by someone 65 and older — the level at which 50% of older households are above and 50% are below — more than doubled between 2000 and 2011 from roughly $12,000 to $26,000, according to a U.S. Census Bureau report. While that might not sound like a lot of debt, America's seniors saw a much bigger jump in percentage terms than any other age group.

Still, the figures show American seniors have grown much more likely to be in debt – even as other groups have become less likely to have debt. People 65 and older were more likely, for example, to have a mortgage in 2011 compared to 2000, while people under 55 were less likely to have a mortgage – or any debt. For seniors, the typical level of "secured" debt – including mortgages – jumped from around $25,000 to $50,000.

Older households "are less likely to own their homes free and clear than was once the case," said Richard Fry, a researcher at the Pew Research Center. Increased homeownership by seniors may explain some of the jump, but older Americans over the past decade also ramped up their use of "home-equity" loans, where consumers borrow against the equity in their homes, he said.

The average debt held by senior citizens has ballooned to $50,000 in 2010, up 83% since 2001, according to Federal Reserve data crunched by the Employee Benefit Research Institute.

Families headed by someone at least 60 years old had the largest increase in average mortgage debt, in terms of percentage, between 2000 and 2012, according to the St. Louis Federal Reserve.

It's not because more older Americans bought homes, said Bill Emmons, an economist with the St. Louis Fed. Instead, they borrowed big against their houses. Some took out home equity loans, while others refinanced and took out cash, but also extended the term of their mortgages.

Money was easily available before the credit crisis in 2008 and it was cheap. Some senior citizens used the funds to make home repairs, pay for vacations or help their children, while others put the proceeds in the stock market, figuring they could make a lot more money.

Only 24% of homeowners over the age of 62 had mortgage debt in 1992, but that figure soared to 45% in 2010.

"Virtually everyone borrowed more because of availability and incentives," says Craig Copeland, senior research associate at the Employee Benefit Research Institute. "Surprisingly, older people got the bug too."

Census researchers also found that only 69% of U.S. households had any debt in 2011, compared with 74% in 2000.

Although these statistics are currently outdated, the process and the consequences of reduced spending power for seniors remains the same if not worse.