High inflation harms older households — and two factors determine who is most at risk, research finds

High inflation eased slightly in April, which may provide some relief to consumers who have been contending with elevated prices.  

For retirees and people approaching retirement, higher than normal inflation poses unique challenges.

Most retirees have access to one of the few inflation-adjusted sources of income — Social Security — that is adjusted every year to keep pace rising costs.

This year, Social Security beneficiaries saw a 3.2% increase to their benefits.

The Social Security cost-of-living adjustment may also be 3.2% in 2025 based on the latest government inflation data, estimates Mary Johnson, an independent Social Security and Medicare policy analyst.

That estimate may change between now and October, when the Social Security Administration announces next year’s cost-of-living adjustment, or COLA. The average Social Security COLA has been 2.6% over the past 20 years, according to The Senior Citizens League.

While Social Security benefits are keeping pace with price increases, the effects may vary for individuals depending on their personal expenses and where they live, noted Laura Quinby, senior research economist at the Center for Retirement Research at Boston College.

“It’s getting ninety percent of the way there for most households every year, which is just incredibly valuable,” Quinby said.

Yet even with inflation-adjusted benefits, retirees have struggled with higher prices since inflation rose in 2021. And near-retirees have also faced challenges planning for a new life phase amid a rising cost of living.

That can both reduce their current spending and diminish their accumulation of wealth for the future.

New research from the Center for Retirement Research looks at exactly how inflation has impacted people who fall in those groups — near-retirees under age 62 and retirees ages 62 and up.

Two factors determine how well they can manage inflation’s shocks — whether their income and investments can keep pace with rising prices, and the amount of fixed-rate debt they have, the research found.

Inflation impacts an investor’s portfolio assets.

While bonds and fixed-income assets may see price increases, equities may do well, so long as the economy avoids a recession, according to the CRR research.

Households with more wealth tend to fare better amid high inflation, because they’re more likely to be invested in stocks and businesses that continue to grow in value.

Retirees tend to have most of their income from either Social Security or defined benefit pensions. While Social Security is adjusted for inflation, pensions generally are not — a disadvantage for retirees who rely on them.

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Near-retirees are more likely to rely on earnings from work. If their salaries do not keep up with inflation, they are more likely to be affected by higher costs.

More affluent near-retirees may have other sources of income from investments or businesses that grow with inflation. Others may already be collecting pension income.

Households with fixed-rate mortgage debt are at an advantage, since their monthly payments stay the same even as inflation rises. Near-retirees tend to benefit from that, since they are more likely still have mortgages compared to retirees.

When inflation prompts higher costs, it can have a negative impact on both immediate consumption and how much goods and services a household can buy, as well as future consumption, Quinby noted.

Many households tend to cut back on savings and increase withdrawals to try to lift themselves to where they were before inflation picked up.

“But it comes at a cost, which is that they take they take a big hit to their future wealth by doing that,” Quinby said.

Near-retirees who are still working have more flexibility to adjust to higher inflation compared to retirees, since they’re likely to see wage gains.

Pre-retirees who stay in the work force may be able to make up for lost savings if they’re able to catch a time when wages overshoot inflation, Quinby said.

However, just 4% of near-retirees surveyed for the research changed their retirement age in response to inflation, with a four-year average expected delay. Among all near retirees, 34% adjusted their retirement date.

Retirees have less flexibility to address the effects of high inflation. But where they can, they can take advantage of higher interest rates by reinvesting fixed-income investments that may be earning less, the research suggests.