Recently, the bureaucrats over at the Social Security Administration (SSA) announced Social Security beneficiaries won’t get a cost-of-living increase in 2016—no raise.
It actually isn’t that the SSA’s officials are penny pinchers. The feds base cost-of-living adjustments on the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers—the so-called CPI-W. By law, the SSA looks at the rate of change in the CPI-W from Q3 of the prior year to Q3 of the current (matching the government’s fiscal year). The year-over-year rate of change is the adjustment.
In 2015, that rate of change is -0.6%. Now, the government doesn’t reduce benefits when the gauge falls, but that does mean no increase. The law says your life didn’t get any more costly over the last year.
This creates a bit of a conundrum for those in the midst of retirement planning for 2016, we’re betting, because these CPI-W’s changes might bear no resemblance to the change in your personal cost of living. The CPI-W, after all, is based on a basket of goods and services. The only way the rate of change in it matches the change in your cost of living is if you consume all the goods and services in the basket in the exact weights the statistic assigns to each.
Here they are:
CPI-W Weights of Major Categories
Do you spend only 6% of your income on Medical Care? 7% on Education? 1% on Alcohol? Do you spend 40% on Housing? More? Less? For many retirees, these figures likely look completely different than the gauge the government uses to index Social Security.
And some of the categories retirees spend the most on—Medical Care, for example—appreciate at a rate far exceeding the CPI-W’s headline rate. In 2015, for example, Medical Care is up by 2.5% while headline CPI-W is down. Are you helping pay for your grandkids’ college education? Those costs are rising far faster than CPI. This is why many reports highlighted the fact Social Security’s cost-of-living adjustments haven’t kept up with actual inflation.
So what should you do about it? You could start a campaign writing letters to your Congressman, but paper and stamps aren’t cheap either. Emails get deleted, and your time is valuable too. Instead, we’d suggest this is a reason why your retirement investment portfolio must have some element of growth in it—likely some stocks. If you are invested exclusively in cash or low-returning bonds, the fact of the matter is you might be losing the purchasing power of your portfolio—and Social Security.
You can’t do anything about the cost-of-living rate the government does or doesn’t provide retirees. But you can look out for yourself and ensure that the stealth tax—inflation—doesn’t quietly eat away at your retirement.