There’s a proposal meandering through Washington to modify the way annual Social Security benefit increases are calculated. This suggestion has been both introduced and attacked from both sides of the aisle, which may be an indication that while any proposal to strengthen Social Security (read “collect more and pay out less”) will be unpopular, this recommendation is a credible attempt to compromise and is fairly likely to be adopted in time.
Currently Social Security benefits are adjusted annually based upon the well-known consumer price index or CPI. With the current metric, when prices of free-range beef and Alaskan salmon rise, the price increases are reflected in the corresponding index. Thus, under the current system higher food prices would likely be result in an increase in monthly Social Security benefits. In 2013 the index supported a 1.7% increase for Social Security recipients.
The introduction of the “chained” CPI as an alternative method for calculating Social Security benefits exploits the fundamental economic concept of substitution. When prices go up for a particular item like the surf and turf mentioned previously, consumers aren’t forced to spend more. Instead, they are free to turn from the fresh meat or seafood counter and walk back towards aisle 17 where they will find an abundance of lower-priced alternatives. In this example, SPAM and sardines would fit the bill. While the chain-linked CPI clearly offers little consideration for those with discerning palates, the index deems the consumer well-fed at a substantially lower cost.
Certainly this example invites a spirited debate as to whether mystery meat and an oily bait fish are indeed acceptable substitutes, but there is a far more serious underlying message. Even the retiree who enjoys an occasional SPAMburger should recognize that their future Social Security benefit is unlikely to keep pace with the rising cost of their living. That burden falls squarely upon one’s personal retirement savings.
Pre-retirees who would like to maintain their current standard of living are well-served fully vetting their nest egg to evaluate its ability to provide consistent, after-tax retirement income that increases annually at a rate in excess of the rate of inflation to offset the meager increases expected on their Social Security benefits. With proper planning, you may be able to skip aisle 17 all together.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.