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Outrage Over No Social Security Increase

The Social Security Administration just released the fact there will be no increase in benefits next year — the second year in a row without an increase for more than 58 million retirees and disabled Americans. The announcement marks only the second year without an increase since automatic adjustments for inflation were adopted in 1975. The first year was this year.

The media is spinning this story as if this is a great injustice to seniors on social security.  Very few stories explain that the reason there is no increase in social security next year is because we’ve not had inflation.  These are called COLA’s (Cost of Living Adjustments) for a reason. The intent of a COLA increase is to keep the purchasing power level.

Consider this, if we slide into deflation, we will need to be actually cutting social security checks.  That would be because the cost of living was going down.

Many people don’t realize there is no difference in a 5% COLA increase with 5% inflation, a 0% increase with 0% inflation, or a 2% cut with 2% deflation.  Purchasing power remains exactly the same in all three scenarios. 

Unfortunately, given these three scenarios, most people would feel they are getting something more with a 5% raise and 5% inflation and most would be outraged if their checks were cut 2% with 2% deflation.  The key is purchasing power and most people just don’t understand the math.

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10 Responses to Outrage Over No Social Security Increase

  1. Rich Colman October 15, 2010 at 7:53 am #

    Hi Rick:

    Good point! Please note that Social Security never decreases. So in a deflationary environment, even though Social Security will not increase, the recipients receive a pay increase. This is basically what has happened in Japan for the last 20 years!

  2. Lois Sturdivant October 15, 2010 at 8:03 am #

    I agree. Unfortunately, most people don’t understand the math, since there have been few deflationary periods in their recent memory. Without the mathematical analysis, it appears that benefits are being decreased.

  3. Susan Galvan October 15, 2010 at 8:37 am #

    For those of us who rely on the miniscule income of our SS check each month (mine is $1004), you all are missing the point. The COLA is based primarily on manufactured goods. People living on Social Security must purchase basics: food, fuel, medicines, rent. These are largely excluded from inflation indexes. The first three have gone up considerably in cost the past two years, and are going up more with each passing day – I know this because we live on a very tight grocery budget each week for food. Our ability to purchase necessities is being rapidly eroded – we could care less about more manufactured goods.

    There are millions now of involuntarily retired people who are age 62 or older. Their prospects for employment are dim to nonexistent. Social Security is survival for far too many, and what it provides is diminishing daily.

    Yes, our government is bankrupt and manipulated by thieves and permeated with corruption. We may lose our SS and other pensions due to the flagrant greed and dishonesty which have brought our economy to the verge of collapse. Those who suffer the consequences are not the robber barons, but the elderly, the disabled and the poor (not including welfare queens here).

    Financial planning clients are generally well-cushioned, compared to the other 97% of us. However, that 97% is getting very, very restless, irritated, and activated by the inequities that have been facilitated by those entrusted with civic responsibility. Word.

  4. Rick Kahler October 15, 2010 at 11:27 am #

    Susan, Your comments suggest that perhaps the “official” CPI is not the actual. That could certainly be the case and many would argue you are right. You underscore the primary weakness of TIPs bonds in that the borrower (the US Govt) has a conflict of interest as they estabilshe the CPI which directly effects their borrowing costs (interest rate).

    I don’t think anyone currently on Social Security will lose it. This program is a cinch to fix, compared with Medicare. We just need to elect officials that will do like the Torries in the UK are doing, and that’s tell the truth about how bad things are and fix them.

    The real budget buster is Medicare and Medicade. Certainly, government medical benefits will eventually be cut. Most of our politicians have made unsustainable promises to foster their short term careers. That chicken is coming home to roost.

    Indeed, those few who have planned, sacrificed, and saved are better off. It a shame it is such a small portion of the population. My statistics suggest that 7% of people saved enough to take care of themselves after retirement. Most of the 93% who chose not to do financial planning were irresponsible. Certainly a minority of those, perhaps like yourself, were unlucky or less fortunate.

  5. Susan Galvan October 15, 2010 at 11:39 am #

    Thank you for your comments, Rick. In regard to medical costs, here’s what I observed when my 36 year old son was diagnosed with Malignant Fibrous Histiocytoma (a huge sarcoma in the muscle of his quadricepts – the size of a newborn baby when finally diagnosed).

    He had not worked in the months just prior to diagnosis. Therefore, he qualifed as indigent and became a patient of the County – and then later, of MediCal. He received the finest medical care in the country for his form of cancer – at UCSF. We expected them to amputate his leg at the hip. Instead, he was hospitalized with intensive chemo – twice – then had surgery to remove the huge tumor, and then had six weeks of daily radiation. All medical personnel and facilities made BIG BUCKS off his treatment protocol. It was clear to me from the day of diagnosis that his chances of survival with such a large tumor were very minimal – but they still went all out and kept him thinking he would recover. He didn’t – he died, after two spinal fusion surgeries, more hospitalization, more radiation, etc.

    My point is, everyone profited from his terminal cancer but him. Something is rotten somewhere in Big Medicine, Big Pharma…they are major players in the Corporatocracy, and we are the ones who will end up paying their price. It will be the middle class who’ve lost benefits who will end up holding an empty bag when it comes to medical care. The poor and the rich will be just fine, because that’s where the money is.

  6. Duane Berke October 16, 2010 at 5:30 pm #

    Rick, I read with interest the reponse from Susan Galvin. She makes a point that I think all too often is overlooked, and that is the relational effect of inflation or deflation. Said in another way, it depends on where the consumer is at in terms of their financial life. Consider the retired 65 year old with their home paid for but living on 40k. The essentils become the major portion of their disposable income, i.e., insurance, drugs, food, gas, clothing and miscellaneous. I have often thought of this in relation to myself and the message is quite clear, equities cannot be left out of the retirement portfolio even after I am no longer earning income. I would like to hear from you as to what you would guess the current actual cost of living increase has been for the 40k 65 year old individual living in Rapid City.

    As always I enjoy your guidance in your e-mails. Thx

  7. Rick Kahler October 16, 2010 at 6:04 pm #

    Duane,

    Based on information listed on http://www.shadowstats.com the CPI based on the way it was figured in 1990 is about 8.5%. Based on the current methedology it is under 1%. If the shadow stats is correct, the current CPI grossly understates the actual inflation rate. If that is indeed the case, I am wondering why the Fed is so concerned about deflation?

    Certainly, equities are an important part of any retirement portfolio. However, equally important are alternative investments and bonds. Portfolios invested in about 1/3 bonds, alternative, and equities did about 5 to 6% from 2000 to 2010….far from the lost decade we hear the financial press talk about so often.

  8. Tanya Steinhofer October 17, 2010 at 9:08 pm #

    Try explaining to my retired mother who just experienced a 15% increase in her health insurance premium (which represents a significant portion of her total monthly expenses) that there is no inflation at present so it is ok that her social security check isn’t increasing. This is yet another example of actual inflation being different from official inflation. However, maybe we should use this opportunity to start teaching our clients who are still working that they shouldn’t rely too heavily on social security and other entitlement programs in the future. 🙂

  9. Rick Kahler October 18, 2010 at 4:38 am #

    Tanya, You make an excellent point. Relying on SS for retirement income is a poor option compared with accumulating enough wealth to fund it your self.

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