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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Will 2011 be Another Stagnant Year for Cost of Living Adjusted Social Security Checks?

Politics / Inflation Oct 12, 2010 - 08:46 AM GMT

By: Nilus_Mattive

Politics

Best Financial Markets Analysis ArticleIn just a few days, the Social Security Administration is going to let retirees know how much their checks will go up next year. Or, in this case, how their checks aren’t going to go up at all.

If you were collecting this year, that’s going to sound painfully familiar because you heard the same thing last October!


That’s right — it’s looking like Social Security recipients are going to get no cost-of-living adjustment (COLA) for a second straight year. Sure, we could all be surprised, and an increase may still come.

But I think it’s unlikely. And today I want to talk about why that is, and why it may not jibe with your personal experience.

There’s Nothing Worse Than a COLA Gone Flat

Since 1950, Social Security recipients have been getting cost-of-living adjustments.

So how exactly does Uncle Sam decide how much to dole out?

The current method, adopted in 1972, uses the change in the Consumer Price Index (CPI) from July through September vs. the same period a year earlier … UNLESS there was no inflation adjustment made. In that case, it goes back to the last third-quarter period when an adjustment was warranted.

Translation: This year, the Social Security Administration will look at the change in CPI during the third quarter of 2010 vs. the CPI in the third quarter of 2008.

Since the CPI is likely higher than it was last year, but not higher than it was in 2008, it means even measurable actual inflation won’t result in a pay raise for retirees.

That’s bad enough.  

What’s worse, of course, is something I’ve pointed out before: The CPI is about as accurate as a drunk guy throwing darts … and it rarely mirrors what we actually experience in our daily lives.

For example, Social Security recipients got no COLA this year because inflation was supposedly tame. Yet my personal health care insurance premium went up 9 percent in 2010! And it’s not like groceries or fuel got dirt cheap, either.

What gives?

It all boils down to how the CPI is constructed. Here are just four reasons why the measure falls short of accuracy:

#1. Hedonic regression — That’s the government’s fancy way of saying that technological improvements in a given product mean you’re getting more for your money.

Let me give you an example of how this supposedly works:

Say you bought a basic car in 1980. It probably wouldn’t have had airbags or a CD player. Today’s basic cars come with both.

So rather than just admit that the average price of a basic car has risen by the exact percentage, the people who calculate CPI might readjust the number to reflect the fact that CDs and airbags represent substantial improvements for today’s car buyers.

In other words, they might lower the real rate of price increases to reflect this fact.

Never mind that you might not want a CD player. The fact that manufacturers put them in the dash and force you to buy them means you’re coming out ahead!

Hedonic regression is used for clothes, computers, and more. And it lends some credence to the old saw that while figures don’t lie, liars can certainly figure.

#2. Product substitution — This is like the evil twin of hedonic pricing. Under this scenario, if corn gets too expensive, the government just figures you’ll switch to carrots. So they stop tracking corn and start tracking carrots.

But that’s a rather huge assumption. And I’m still waiting to hear what the substitute for gasoline will be.

#3. Most taxes are excluded — CPI calculations don’t factor in federal, state, or local taxes, even though they are probably sucking away a lot of your income.

Nor does it matter that property taxes have increased substantially for many homeowners over the last decade. Nope, that’s not inflation for regular ol’ urban consumers!

#4. Bizarro real estate figures — Real estate prices make up a quarter of the CPI-U, and let me tell you … Washington doesn’t measure housing prices like normal people.

Instead, it uses a measure called owner’s equivalent rent (OER). This is what homeowners think they could rent their houses for. And especially for folks like retirees — who tend to own their homes outright — this measure is completely irrelevant to what they experience in their regular lives.

The bottom line: The CPI is not an accurate measure of what we experience … and it’s definitely not properly weighted toward the things that most retirees actually spend their money on.

If we assume that checks don’t go up in 2011, that will mean an average annual increase of just 2.3 percent over the past five years.

And according to an August report from the Congressional Budget Office, the COLA may only go up 0.4 percent in 2012!

Sure, there are still ways to maximize the Social Security payments you receive but the overall message is pretty clear: You need to develop additional sources of income if you want to actually enjoy your Golden Years.

Best wishes,

Nilus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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