With all of the downfall and borderline panic on Wall Street over the alleged threat of inflation, there is some modestly good news here – if recent trends continue.
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Social Security beneficiaries could be heading for the biggest spike in their monthly checks this year since the financial crisis over a decade ago.
That says the Senior Citizens League, a think tank and advocacy group. Corporate analyst Mary Johnson told the website told ThinkAdvisor that based on recent trends, social security beneficiaries expect a 4.7% cost of living adjustment in 2022 when the announcement is released in October.
That would be way ahead of this year’s increase of 1.3%; 1.6% in the previous year; or the ten-year average, which was less than 1.4% per year.
Read: Do Retirees Have to Be Afraid of Inflation?
Of course, the figures should be treated with caution: the annual adjustment of the cost of living, first approved by Congress in 1972, serves only to maintain purchasing power. It is not an “increase” in real, dispensable terms.
In practice, however, it may not work that way. The Cost of Living Adjustment (COLAs) is based on a specific inflation measure tailored to the supposedly typical shopping basket of working-age workers living in cities. But many seniors will find that they spend their money differently than a 30-year-old office worker in New York or even Minneapolis.
For example, they spend less on cars and clothes – and on Friday evenings on tequila shots – and more on medical care, prescription drugs and (possibly) nursing homes.
The government also tracks an experimental inflation index for older Americans. As for the interesting factors, over the past 12 months prices have increased 5% across the economy, but government data says medical costs have only increased 1%. (If you disagree, don’t write to me to complain, write to US Secretary of Labor Marty Walsh. It is his department that produces these numbers.)
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In the meantime, here’s an important factor that they never tell you about when trying to scare you into “runaway inflation”. The official figures are dominated by the cost of home ownership. The government estimates that these city employees spend 30% of their annual budget renting or owning an apartment, and the elderly pay 36%. These numbers are on top of the utility bills.
Yet they don’t use real numbers to calculate the cost of your home. They use subjective, made-up numbers known as “owner-equivalent rent”. You are trying to guess what you would have to pay if you rented your own house.
Seniors who own their own homes or, just as importantly, live in a part of the country where real estate is cheaper, may find their own inflation rates to differ from those of the government. Because while housing costs are rising, anyone who has used the low interest rates to refinance a mortgage in the past year has seen their actual cash costs fall – no matter what the “owner-equivalent rent” may mean.
None of this means that every Social Security beneficiary will be a net winner or loser in inflation calculations, just that it is more complicated than it appears. If my mortgage costs me 20% less a month but my social security check goes up 5%, I’ll be better, not worse.
Mind you, all of this may be debatable. Although Fears of inflation have risen over the past month, the main financial barometer is not impressed. When it comes to forecasting inflation, the real numbers are not the consumer price index or the producer price index, but rather Bond market forecasts. Because some US Treasuries are inflation-protected and some are not, bond traders can make trillions of dollars if they can successfully predict what will happen to prices. The resulting bond market inflation projections aren’t perfect, but they’re the best we have and worth far more than all the empty air on TV.
And right now those projections are going down, not up. They had risen sharply earlier in the year to be sure. But the five-year inflation forecast, for example, is now 2.44%. That’s a 2.72% decrease a month ago. The same applies to the 10-year forecast. It made more sense to worry about inflation a few months ago when the numbers went up. But unless they turn around and start charging higher again, there seems little reason to panic.
