Retirement

Social Security recipients; don’t count your chickens moving to the CPI-E

Some advocates and politicians have been arguing for years that the current determinate of the Social Security COLA, the CPI-W is not an accurate reflection of inflation for older Americans. Legislation being promoted in Congress, the Social Security 2100 Act would switch to the now experimental CPI-E.

However, retirees should not get too excited, there is no guarantee this will produce higher COLAs and even if it does, past experience indicates the difference will be very modest.

CPI-E From From December 1982 through December 2011, the all-items CPI-E rose at an annual average rate of 3.1 percent, compared with increases of 2.9 percent for both the CPI-U and CPI-W. There are several reasons that older Americans faced slightly higher inflation rates over the past 29 years.

[For the average Social Security beneficiary this difference equals $2.80 per month]

First, older Americans devote a substantially larger share of their total budgets to medical care. The share of expenditures on medical care by the CPI-E population is roughly double that of either the CPI-U population or the CPI-W population. In addition, over the 1983–2011 period, medical care inflation increased significantly more than inflation for most other goods and services (5.1 percent annually for medical care, compared with 2.8 percent for all items less medical care).

Second, older Americans spend relatively more on shelter, and during the last 29 years shelter costs have modestly outpaced overall inflation. Although the CPI-E generally outpaced the official measures of inflation over the 1983–2011 timeframe, recent trends show different results. From 2006 to 2011, both the all-items CPI-E and the CPI-U rose at an average annual rate of 2.3 percent, while the CPI-W increased 2.4 percent. This turnaround was caused primarily by changes in the relative inflation rates of medical care and shelter, compared with the overall inflation rate.

Specifically, the gap between medical care inflation and overall inflation has generally fallen since 2005, and shelter inflation has been rising slightly more slowly than overall inflation over the 2006–2011 period. Source: Bureau of Labor Statistics.

So, while using the CPI-E may produce a higher COLA, it may not as well. Americans still need to save for their retirement.

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6 replies »

  1. .

    Originally SS income was NOT taxed at all. It was first taxed 50% under Reagan… then 85% under Clinton. Back in 1984 the income amounts at which SS became taxable were considered high/rich. But because those income amounts were never indexed for inflation… now, after decades of inflation, low and middle income seniors pay taxes on their SS income. This current bill will correct that injustice.

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  2. .

    The best thing about Larson’s new bill, Social Security 2100 Act… it will cut taxes on millions of low and middle income seniors by raising the threshold incomes at which Social Security income is taxed. Those threshold incomes were never indexed for inflation since the income tax on SS first began in 1984. This bill will correct that injustice. The GOP should have already corrected this last year in their tax reform… but they didn’t. This is an important issue with both Democrat and Republican seniors. I hope Trump and other Republican lawmakers will support Larson’s bill.

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      • .

        But it doubles the current income thresholds before Social Security income is taxed… to $50,000 single / $100,000 couple… and that would be a tax cut for millions of low and middle income seniors. The previous GOP controlled congress failed to correct this senior tax burden when they did their tax reform and will likely kill this bill in the current GOP controlled Senate Like many seniors I know… if the GOP kills this SS bill, I will NOT vote GOP in 2020.

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      • But it is still ok to tax a single working man earning $49k or a married working couple earning $99k because they are not over 62? Isn’t the fair thing to do would be to share the tax burrend on all Americans since it is mostly the older generation that allowed the national debt and government to grow?

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      • .

        Originally SS income was NOT taxed at all. It was first taxed 50% under Reagan… then 85% under Clinton. Back in 1984 the income amounts at which SS became taxable were considered high/rich. But because those income amounts were never indexed for inflation… now, after decades of inflation, low and middle income seniors pay taxes on their SS income. This current bill will correct that injustice.

        .

        Like

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