The Patterns Of Social Security Purchasing Power &  Quality Of Life In Retirement (Series Overview)

By Daniel R. Amerman, CFA

Social Security has only "partial inflation indexing" - and those three words may dominate standards of living in retirement for many millions of people for decades.

This groundbreaking series of financial analyses provides easy to understand explanations of what is happening and why. As each stage is developed, visual patterns provide the needed information in an intuitively understandable form.

The Social Security Inflation Lag Calendar - Partial Indexing Part 1

There are two distinct forms of inflation lags as explored in the Part 1 analysis which is linked here. We have the lag between when inflation is measured (the light blue bars) and when the first payment based upon that measurement is actually made (the red bars).

And then on top of that we have a steadily decreasing purchasing power for each benefit over the course of the year which with historically average inflation means that the December benefits are likely to have a purchasing power of only 95 cents on the dollar.

Using the twin lags, we develop the first of our patterns that will govern standard of living in retirement, those of the green stair step pattern of nominal annual benefit increases to keep up with inflation, and the red "saw-tooth" pattern of actual purchasing power.

Out Of Money By December 12th - Social Security Partial Inflation Indexing Part 2

In Part 2 of this series of analyses as linked here, we moved from long-term averages to what has been happening in recent years.

We've had a much lower government reported inflation rate and we've had much lower benefit increases. Crucially, we've also had a mismatch between the benefit increases as determined by the government using its detailed methodology with the CPI-W index, and what the government reports to be average inflation for the nation with the CPI-U index.

Even the minor mismatch between indexes is enough to produce the yellow pattern of lost purchasing power lost for the nation as a whole in terms of retirees who are relying upon Social Security, or other retirees such as federal government employees who are receiving their own inflation indexed payments.

Out Of Money By November 29th - Social Security Indexing Part 3

For the third analysis as linked here, we move to the future and explore the long-term implications of historically average inflation, and a minor 0.60% annual mismatch between Social Security benefit increases, and the actual growth rate of retiree expenses.

This produces a larger red saw-tooth pattern of inflation lag losses, and a significant increase in the area of the downward yellow zigzag pattern of purchasing power losses.

As developed in the analysis, these two seemingly minor real world considerations can on a combined basis consume one month of the purchasing power of Social Security in the span of ten years. This subtle but steady process can place the retirees of an entire nation in the place where they have only 11 months of purchasing power compared to today, but still have 12 full months of expenses to pay.

These purchasing power shortfalls can have a dominant impact on actual standards of living in retirement. Fully understanding and preparing for these subtle but critical issues can also lead to major changes in the financial planning process.

The Critical Impact Of Medicare Premiums On Social Security Inflation Indexing (Part 4)

The Part 4 analysis which is linked here, explores what could be called a somewhat ironic generational knowledge mismatch, when it comes to how Social Security actually works. On theone  hand we have tens of millions of people in their 40s, 50s and early 60s who are earnestly making retirement plans based on the common assumption of the full inflation indexing of Social Security benefits.

On the other hand we have many millions of people in their late 60s and older who are actually collecting Social Security benefits while paying Medicare premiums - and they understand full well what a poor joke the inflation indexing of Social Security has been in practice in recent years.

When we take into account that the very small increases in Social Security benefits in recent years have been almost entirely consumed by the increases in Medicare Part B premiums, then we get the realities of the patterns below. (This is based on the very low reported inflation rates and benefit increases of recent years as covered in the Part 2 analysis, rather than the long term averages of Part 3.)

The green stair step of benefit increases becomes semi-transparent - because the cash never reaches most recipients, not when the withholding of Medicare premiums is taken into account. Instead there is the purple area of net increases in benefits after Medicare deductions, which is very hard to see - and this is accurate because it very hard to see what has been on average only a $2 increase that takes place over three years.

This almost complete lack of inflation indexing in practice produces the blue area of purchasing power losses when Medicare premiums are taken into account, and this pattern moves downwards in an almost straight line.

While it has received little coverage, the average Social Security recipient has on a smoothed basis lost two weeks of purchasing power just between 2015 and 2017. If current trend lines continue and we extrapolate the recent past into the future, then 3 weeks of purchasing power will be lost by 2019, 4 weeks by 2021, and by 2024 the average retiree will have only about 46 weeks of purchasing power to cover 52 weeks of expenses (relative to 2015).

What the Part 3 & 4 analyses cover is two quite different ways where the nation can lose a month of net Social Security purchasing power within the next ten years.

 

What you have just read is an "eye-opener" financial analysis about critically important retirement decisions, and how they can change when we take a holistic look at the future.

 

Retirement lifestyle is determined by both benefits and savings. Linked here is a related "eye-opener" that shows how the government's suppressing interest rates can reduce retirement investment wealth accumulation by 95% over thirty years, and how low interest rate policies are profoundly reducing standards of living for those already retired.

National debts have been reduced many times in many nations ─ and each time the lives of the citizens have changed. The "eye-opener" linked here reviews four traditional methods that can each change your daily life, and explores how governments use your personal savings to pay down their debts in a manner which is invisible to almost all voters.

 

The U.S. national debt is likely to change our daily lives in multiple ways over the coming decades, some of which are little understood by savers and investors. As shown in the first row of analyses in the matrix which is linked here, heavily indebted nations have major challenges when it comes to interest rates, inflation, financial stability and the ability to make Social Security and Medicare payments in full. As is examined in the second row of analyses, each of those national challenges can directly translate to life-changing personal challenges as well.

 

 

If you find these "eye-openers" to be interesting and useful, there is an entire free book of them available here, including many that are only in the book. The advantage to the book is that the tutorials can build on each other, so that in combination we can find ways of defending ourselves, and even learn how to position ourselves to benefit from the hidden redistributions of wealth.