The news that Social Security beneficiaries didn’t receive an inflation adjustment this year has renewed debate about how we measure the cost of living for seniors.
A strong case can be made that the current formula driving Social Security’s cost-of-living adjustment (COLA) is out of whack. The COLA is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which gauges a market basket of goods and services of working people–who tend to be younger and spend less on healthcare than seniors.
The inflation rate experienced by seniors often runs higher than the CPI-W reflects. That has implications for federal policy–many advocates for seniors have pushed for adoption of the CPI-E, an experimental measure created by the U.S. Bureau of Labor Statistics to measure the inflation affecting elderly Americans. There’s been a countervailing push to use the “chained CPI” which would result in even smaller COLAs that those currently awarded.
But the higher elderly inflation rate also has implications for portfolio management and pocketbook management for retirees. Retirees are especially vulnerable because they don’t have the capacity to counter inflation by seeking higher wages, and returns on low-risk fixed-income investments aren’t getting the job done in a time of near-zero interest rates. (Rates may start to tick upward now that the Federal Reserve has signaled the end of of it’s zero-rate policies, but don’t hold your breath).
The Right Yardstick?
From 1985 to 2014, the CPI-W ran 6.5% behind the CPI-E, according to research by J.P. Morgan Asset Management. A slowdown in healthcare cost inflation has, however, led the two indexes to converge a bit during recent years. But if medical inflation does take off, the argument for using the CPI-E is likely to heat up again.
And health inflation does appear to be returning to its historical norm–about 7% annually. Renewed health inflation fueled the controversy over the flat 2016 Social Security COLA because some Medicare beneficiaries–those not “held harmless”–could have faced a huge 52% hike in Part B premiums. (That didn’t happen: If you’re not on Social Security but enrolled in Medicare, you’ll be paying $118.80 per month, plus a monthly $3.00 surcharge, for a total of $121.80. The Part B deductible will be $166.00 for all beneficiaries, up from $147.00.)
And Medicare’s trustees forecast that the Part B premium will reach $140.00 in 2020, and $174.00 in 2024.
Furthermore, premiums for the 10 most popular Medicare Part D plans are jumping an average of 8% next year, and five of the most
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