Re: Millions face shrinking Social Security payments
- From: mg <mgkelson@xxxxxxxxx>
- Date: Mon, 24 Aug 2009 09:44:32 -0700 (PDT)
On Aug 23, 8:27 am, Eugene Garcin <eg1...@xxxxxxxxxxxxx> wrote:
Millions face shrinking Social Security payments.. . .
By STEPHEN OHLEMACHER
ASSOCIATED PRESS WRITER
President Barack Obama talks about the the Afghan elections, Friday, Aug. 21, 2009, outside
the White House in Washington, prior to boarding Marine One and departing for the presidential retreat
at Camp David, Md. (AP Photo/Alex Brandon)
WASHINGTON -- Millions of older people face shrinking Social Security checks next year, the first time
in a generation that payments would not rise.
The trustees who oversee Social Security are projecting there won't be a cost of living adjustment
(COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.
By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for
millions of people in the Medicare prescription drug program because the premiums, which often are
deducted from Social Security payments, are scheduled to go up slightly.
"I will promise you, they count on that COLA," said Barbara Kennelly, a former Democratic
congresswoman from Connecticut who now heads the National Committee to Preserve Social Security and
Medicare. "To some people, it might not be a big deal. But to seniors, especially with their health
care costs, it is a big deal."
Cost of living adjustments are pegged to inflation, which has been negative this year, largely because
energy prices are below 2008 levels.
Advocates say older people still face higher prices because they spend a disproportionate amount of
their income on health care, where costs rise faster than inflation. Many also have suffered from
declining home values and shrinking stock portfolios just as they are relying on those assets for
income.
"For many elderly, they don't feel that inflation is low because their expenses are still going up,"
said David Certner, legislative policy director for AARP. "Anyone who has savings and investments has
seen some serious losses."
The CPI calculation is manipulated to provide an artificially low
inflation number. The very simple solution to this problem for Social
Security beneficiaries is to calculate annual adjustments based on the
wage index rather than the CPI. This is the way that your original
benefit amount is calculated. If memory serves, I have posted a lot on
this subject over the years, but no one ever seemed to be interested.
The wage index for 2008, incidentally, is estimated to have increased
by 4.1%. Perhaps now there will be a little more interest there will
be a little more interest in the issue of the wage index vs the
CPI . . . .and perhaps not. :-)
http://www.socialsecurity.gov/policy/docs/chartbooks/fast_facts/2008/fast_facts08.html
In any case, here's some information describing the problem with the
CPI calculation:
----------------
"Over the years, the methodology used to calculate the CPI has also
undergone numerous revisions. According to the BLS, the changes
removed biases that caused the CPI to overstate the inflation rate.
The new methodology takes into account changes in the quality of goods
and substitution. Substitution, the change in purchases by consumers
in response to price changes, changes the relative weighting of the
goods in the basket. The overall result tends to be a lower CPI.
However, critics view the methodological changes and the switch from a
COGI to a COLI focus as a purposeful manipulation that allows the U.S.
government to report a lower CPI.
John Williams, a U.S. economist, described his view of this
manipulation when he was interviewed in early 2006. Williams prefers a
CPI, or inflation measure, calculated using the original methodology
based on a basket of goods having quantities and qualities fixed.
David Ranson, another U.S. economist, also questions the official
CPI's viability as an indicator of inflation. Unlike Williams, Ranson
doesn't espouse the viewpoint that the CPI is being manipulated.
Instead, his view is that the CPI is a lagging indicator of inflation
and is not a good indicator of current inflation. According to Ranson,
increases in the price of commodities are a better indicator of
current inflation because inflation initially affects commodity prices
and it may take several years for this commodity inflation to work its
way through an economy and be reflected in the CPI. Ranson’s preferred
inflation measure is based on a commodity basket of precious metals.
What is immediately apparent is that three different definitions of
the CPI are being used. Since these definitions are not operationally
equivalent, each method of measuring inflation would lead to different
results.
Different CPI or Inflation Levels
It does appear that the differing means of measuring inflation produce
disparate indications of inflation for the same period. The November
2006 Consumer Price Index Summary, which is published by the BLS,
stated that "During the first 11 months of 2006, the CPI-U rose at a
2.2% seasonally adjusted annual rate (SAAR)". Williams' estimate of
CPI for the same period was 5.3%, while Ranson's reported an 8.2%
estimate.
The differences between the BLS CPI and the figures attained by
Williams and Ranson would be of sufficient magnitude, that if the CPI
is being manipulated downward, the outcome of an investment plan could
be less than effective. Therefore, a prudent investor may wish to
obtain more insight and a better understanding of these disparate
views of CPI and inflation measures and the effects they may have on
their investment decisions. (For more insight, see The Importance Of
Inflation And GDP and Macroeconomic Analysis.)"
http://www.investopedia.com/articles/07/consumerpriceindex.asp
.
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- From: Eugene Garcin
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