Rodney Johnson | Friday, December 14, 2012 >>
There’s a lot of talk about Social Security benefits right now. The long run debt and annual deficits are finally big enough to make most sane people stop and take notice. With more than 70 million Baby Boomers on the doorstep of retirement, it might finally be time to fix the system.
Here’s a secret…
Whatever the politicians say about lowering Social Security benefits in the future, it won’t be enough. There’s no good way to raise the age for receiving benefits or means-test out recipients in order to save enough money to repair the system.
So they will find another way. In fact, that “other way” is already on the table…
The government intends to slowly drain the money away from all retirees – including existing retirees – one year at a time.
Many years ago the U.S. government created the Cost of Living Adjustments (COLAs) for Social Security benefits. The goal was to index the payments that retirees received to the changes in what these people had to pay to live.
If the comprehensive measure of inflation (CPI) moved up by 2.3% in a year, then retirees would get a 2.3% increase in their Social Security benefits the following year. The goal was to make sure that retirees were not bled dry by watching the cost of living rise while their income flagged. This makes sense, at least on paper. In reality, it’s proving impossible.
Inflation is a funny thing. It’s discussed as if both sides of the equation – income and prices – move up together by the same amount. Of course, everyone on the planet knows this is not true.
If prices and income moved up by the same amount, then there would be no real reason for an inflation measure in the first place. There must be some slippage, in some form or fashion, that changes the value equation.
That slippage is the unequal move in prices and income. Prices always go up faster, which eats away at our standard of living.
And this is what leads us back to Social Security.
The funds used to pay for Social Security benefits are based on earned income (wages). As we all know from daily life, our earned income doesn’t seem to keep up with inflation.
So if Social Security benefits are tied to inflation, but the wages that are taxed to pay for those benefits don’t keep up with inflation, then obviously there is a yawning gap between the monies received and the benefits that go out the door. This problem is in addition to the demographic issue of too many retirees and fewer workers.
So what’s a government to do?
The answer is clear – lower the rate of inflation. Or more specifically, lower the rate of inflation used to calculate COLAs (Cost of Living Adjustments) for retirees.
Part of the conversation in Washington today is a move to index COLAs to wage inflation, not price inflation. Using this new metric, the benefits paid to retirees will have nothing to do with the change in their cost of living. Instead it will have to do with how little income America is earning these days.
With the stroke of a pen some bureaucrat can bend the curve of Social Security liabilities… not by attacking the cost of living, not by changing the structure of how benefits are earned and surpluses saved, but instead by whittling away at the benefits paid to all retirees, both current and future.
This does not change the cost of gasoline, or food, or medicine. It simply makes these items even harder to afford.
P.S. Tune in to CNBC at 4:30 EST to listen to Harry’s talk with Maria Bartiroma.
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If you want evidence of the price inflation headwinds the average consumer is facing, look no further than price of food. Against a backdrop of global population growth, and a rising middle class in many emerging regions, the demand for food continues to increase.
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Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.