Social Security COLA Refreshes Wobbly Three-Legged Stool

Financial Wellness and Retirement SavingsSocial Security COLA helps retirees.  This increase means beneficiaries receive a 5.9% boost in monthly checks starting in 2022.  That’s the largest cost-of-living or “COLA” increase to Social Security since a 7.4% hike in the 1980s.  It’s also much larger than the 1.3% increase for 2021.

Social Security is one leg of the all-important three-legged retirement income stool.  Employer sponsored retirement plans (which includes both pensions and 401k plans), and personal savings make up the other two legs.  The retirement income stool is looking a bit wobbly these days, as most employees no longer receive a company pension.  This leaves a much heftier burden on Social Security and personal savings to make up the difference.  The latest boost to Social Security helps, but with inflation on the rise – the Bureau of Labor Statistics’ Consumer Price Index shows a 5.4% increase since September 2020.  That still may not be enough.

Therefore, Americans continue to rely heavily on their own retirement savings.  Somehow, retirees must have a retirement savings to sustain them through 20, 30, 40 (or even more!) years once they stop collecting a paycheck.  As a result, employer-sponsored retirement plans continue to play an integral role in helping workers create sufficient savings for the golden years.  Taken together, the savings are significant.  Total retirement assets reached $37.2 trillion in the second quarter of 2021, according to Investment Company Institute, with defined contribution (DC) plan assets accounting for $10.4 trillion of that.

Even with the Social Security COLA there’s much work for the retirement plan industry, plan sponsors, and committees to do.  Around 64% of Americans don’t think their retirement savings are on track, or they aren’t sure, according to a 2020 Federal Reserve study.  The Federal Reserve also found in a 2019 study that the median retirement savings among U.S. adults is approximately $65,000.  The Fed estimates project that figure could grow to an average of $255,200 by retirement.  And yet, most Americans believe they’ll need around $2 million to retirement comfortably.  Clearly, there is a shortfall, and a disconnect in their savings logic.

So it behooves employers to consider innovative solutions to entice employees to save more for the future, particularly retirement.  Perhaps that incentive comes in the form of personalized education, communication, and/or advice made pertinent to an employee’s specific circumstances.  This could include age or stage of life.  Implementing or augmenting a financial wellness program helps employees to understand the importance of building financial security for retirement.  That may also be a catalyst that persuades employees to boost their savings.  Showing employees the power of compound interest, and illustrating future income projections based on current and potential savings rates could also be profoundly impactful.  Suggesting employees meet with a financial professional is a good first step, and sometimes not a big one if there is already an advisor on the plan.  The advisor may serve as the impetus employees need to start saving, or increase their current retirement savings.  Or perhaps it’s a combination of all of these, or something completely different.

It’s not impossible, but unlikely that future Social Security COLA increases will be as sizable as the one slated for 2022. Pensions have largely gone the way of the dodo.  This leaves only American workers’ personal savings as the most important leg of the three-legged retirement income stool, and yet, perhaps the most fragile.  With continued focus, perseverance, education, and innovation a lot can be accomplished!  And perhaps legislation plays a role here as well.  The retirement industry, in partnership with sponsors, retirement plan committees, service providers, and regulators, can strive to make the personal savings leg stronger.


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