Could Social Security Recipients Get a $3,550 Stimulus Payment? Here’s What You Need To Know

There are plenty of retirees today who are living on just Social Security. And seniors who don't have any income outside of those monthly benefits often find themselves struggling to make ends meet.

Part of the problem is that Social Security only pays so much. The average monthly retirement benefit today is about $2,089, which only adds up to about $25,000 in income per year. But a big problem with the formula used to calculate Social Security cost-of-living adjustments, or COLAs, also explains why so many seniors are having a hard time managing their costs.

One advocacy group wants lawmakers to make things up to Social Security recipients in the form of a catch-up or stimulus payment, but there's a reason such a windfall is unlikely to come through anytime soon.

Why Social Security benefits have lost so much buying power

Social Security benefits are eligible for a COLA every year so that benefits are able to keep pace with inflation. But that formula tends to leave seniors in the lurch.

Social Security COLAs are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the year. When there's an increase in the CPI-W for the period of July through September, Social Security benefits go up. If the CPI-W shows a decrease in inflation during the third quarter, benefits stay flat.

The problem is that the CPI-W does not accurately capture the costs Social Security recipients tend to face. That's because the index measures price changes for wage earners, not retirees, who spend their money differently. As a result, Social Security benefits have failed to stand up well to inflation despite getting COLAs year after year.

How Congress could make seniors whole

The Senior Citizens League estimates that Social Security benefits have lost an astounding 13.7% of their buying power since 2016 due to COLAs that have not held up. As a result, the group is pushing for Congress to issue Social Security recipients a one-time stimulus payment of $3,550.20 to "at least partially refund people for years of lagging COLAs."

At the same time, the group is pushing for a new formula to calculate COLAs. Using the Consumer Price Index for the Elderly could allow COLAs to be based on more real-world costs Social Security recipients face, leading to increases that actually hold up.

Why a one-time Social Security catch-up payment is unlikely

While the idea of a one-time stimulus payment for Social Security recipients might seem like a nice thing, it's pretty unlikely. First, there's no precedent for refunding seniors due to insufficient COLAs, and it can be argued that the current COLA formula is fair because it does measure broad inflation changes, even if they aren't senior-specific.

But also, Social Security is facing a massive funding shortfall that could soon result in benefit cuts. If the program has to give out large stimulus checks, those payments will only put a strain on Social Security's already limited resources. As such, seniors should not expect such a windfall anytime soon.

How to supplement your Social Security checks

If you're retired and live mostly on Social Security, you may find that it's been a struggle to keep up with rising costs. And given that, it may be time to take steps to supplement your Social Security checks.

One option is to work part-time, which you're allowed to do while collecting benefits from Social Security. Once you reach your full retirement age, you can earn any amount of money from a job without having to worry about a portion of your benefits being withheld.

Another option may be to turn your home into an income stream if you own it and working isn't feasible. You could rent out a finished garage or basement for income, or otherwise rent out a room if you need the money.

Bottom line

There are many people whose retirement plans hinge on Social Security. But retiring on those benefits alone is one of the biggest financial mistakes you can make.

If you're still working and earning a steady paycheck, it's important to realize that Social Security will only give you so much buying power in retirement. Part of the reason is that your benefits will not replace your pre-retirement paycheck in full, and the other part is that the program's COLAs often fail to actually match real-world inflation for seniors.

Knowing this, you can take steps to avoid financial issues in retirement. Contributing money to a 401(k) or IRA every month could help you build up a large nest egg over time, especially if you invest your money strategically for added growth. You can also choose to hold investments in retirement that pay you on a regular basis, like dividend stocks and bonds, so that you have plenty of income to fall back on once you stop working, in addition to Social Security.

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