…Don’t Kill the Messenger

When inflation rises, retirees' social security checks keep pace with small increases. But if some lawmakers get their way, those raises may be a whole lot smaller in the future.

If the debt-debate in Washington gets much worse it could mean a lot more belt-tightening for America’s seniors, including changes to the COLA for Social Security, the Cost Of Living Adjustment meant to keep seniors at pace with inflation.

The change proposed by both sides of Congress and the White House officials, elaborated in this SmartMoney article, is to adjust the measurement of inflation used when determining the COLA. Inflation is a fairly common concept – the general and expected upward creep of costs – but economists are less certain about the most appropriate measurement. Currently, costs of products are tracked across various economic sectors and inflation is seen as percentage increases in those products, but the economists’ argument is that when product costs rise, the first response is to switch to similar but cheaper products so the actual affect isn’t quite so bad. When a brand name product becomes too expensive people buy generic, and do so for any product that they can switch out, thus keeping costs relatively stable. The suggestion is to use a model of inflation that takes this replacement into account based on all adult consumption, in which case, the COLA would shrink.

Annually, the COLA would grow 0.3% less, and so the overall Social Security payouts will decline over the beneficiary’s lifetime. Over 25 years, for example, the average retiree would receive about $18,000 less in benefits. The problem is that most seniors are already cash-strapped and that is $18,000 more they have to find to make ends meet. To make matters worse, seniors tend to switch-out products less than other adults, also largely because they are already buying the bare essentials and so are less flexible in those spending habits. Many experts worry that the proposed COLA adjustment will leave many seniors in dire straits. If you were counting on Social Security as a large part of your retirement security – as many are – you may want to start learning more about those extreme couponing schemes, or check out the generic product section at your local grocer’s.

Reference: SmartMoney (July 13, 2011) “Coming Soon: Smaller Raises for Seniors?”

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