2014 Social Security Raise Expected to be Tiny

Social Security recipients are going to receive a tiny increase to their benefits again this year.  The preliminary estimate is that the increase will be only about 1.5 percent.  Considering that the average monthly benefit is currently about $1,162, this means the estimated increase will amount to approximately $17 for the typical beneficiary.

The size of the COLA not only affects retirees on Social Security, but also disabled veterans, disabled civilian workers, federal retirees, and SSI recipients, as well as their survivors.  The same cost of living estimates are used for all these groups.  This percentage may also be applied to other types of pensions, so this tiny increase will affect millions of retirees and disabled Americans.

Last year the increase was only 1.7 percent and, prior to that, there were no increases at all for the previous two years.  Over the past few years, more and more Social Security recipients are beginning to feel the pinch.  It is also becoming more difficult for them to put aside money for emergencies or unexpected expenses such as medical co-pays and car repairs.

The reason given for the low 2014 cost-of-living adjustment, or COLA, is because consumer prices have not gone up much during the past year, according to government figures. In addition, fuel prices have actually gone down over the past year.  For people who are still working, lower fuel prices are certainly helpful, although this may be a less significant benefit for people who no longer commute and use their cars very little.

Some advocates for senior citizens say that the way the government measures inflation is unfair to retirees, as they tend to spend a higher percentage of their income on health care.  The low COLA doesn't help them very much since medical costs have actually risen an estimated 2.5 percent over the past year.  This is one reason that so many retirees feel that they have been falling further behind.

Things may become even more challenging for retirees over the next few years.  Congress is currently looking at making changes to all the entitlement programs, including Social Security, Medicare  and federal pensions.  The goal is to make these programs more sustainable in the long run, which is a worthy goal.  However, this plan is likely to make it even tougher for retirees to survive on their benefits alone.

For example, if the government switches to a chained CPI to calculate future cost of living increases, as has been suggested recently by several members of Congress, we can expect to continue to receive extremely low Social Security cost of living increases in the coming years.

AARP has been actively fighting against the use of a chained CPI to calculate future cost of living increases.  However, it may be a hopeless battle, since this currently seems to be the most popular recommendation for entitlement reform.  I will continue to keep my readers up-to-date on developments with regard to this issue.

(The number used in this post for the 2014 COLA will be revised should the actual increase be higher or lower than 1.5%)

Source:

http://news.yahoo.com/social-security-raise-among-lowest-years-122713809.html

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Public domain photo of an early social security card is courtesy of www.wikipedia.com/commons.

Social Security Cost of Living Increases Under a Chained CPI

Since 1975, Social Security beneficiaries have received automatic annual COLA's or cost-of-living adjustments.  These were set up so that our benefits would increase every year in which there was inflation.  Over the decades, COLA's have protected millions of retirees from losing their ability to survive on their benefits plus, ideally, their retirement savings and/or a pension.

Historically, the cost-of-living adjustments have amounted to as much as 14.3% in 1980 down to 0% in both 2010 and 2011.  In 2013, the COLA was only 1.7%.  The amount of the increase each year has traditionally been based on the Consumer Price Index (CPI-W) for the year preceding the increase.  For the average Social Security beneficiary who was receiving $1,240 in 2012, the 1.7% increase raised the amount they were receiving to $1,261 a month. 

The Consumer Price Index that has been used to calculate the size of the of COLA's is based on the prices paid by urban consumers for a specific list of goods and services.  The inflation calculation that has been used in the past is the CPI-W, which is based on goods and services used by urban American workers.  This has been criticized because some advocates for the elderly believe that the CPI-E (or Consumer Price Index for the Elderly) should be used instead.  It relies more heavily on expenses commonly incurred by senior citizens, such as rising health care costs.  However, CPI-W has been used instead, although it is a less generous indicator of inflation.

Now, however, Congress is seriously considering replacing the CPI-W with the even less generous chained CPI.  According to many advocates for seniors, including AARP, this will effectively be the same as a net benefit cut for retirees, as well as for disabled Veterans, who would also see their COLA adjustments change.

President Nixon signed the Social Security COLA law into effect in 1972.  Since then, cost of living increases have been legally mandated whenever the CPI indicates that there has been measurable inflation.  During the past four years, however, the TOTAL cost-of-living increases have only amounted to less than 6%.  Despite this, there is a good chance that future COLA's will be even smaller, should the chained CPI replace the CPI-W as a measure of calculating inflation.

What is the difference between the traditional CPI-W and the chained CPI?  The CPI-W is a formula that measures changes in the cost of items that workers typically purchase.  A chained CPI assumes that, when prices for an item go up, people will substitute less expensive items.  For example, if beef prices rise people will eat more chicken; therefore, they will not actually be spending more money.  This means that the size of the Social Security cost-of-living adjustments do not need to be as large.

At first the difference in the cost-of-living adjustments may not seem to be very much, perhaps just $44 less annually during the first year.  However, the amount of lost revenue continues to compound annually.  For example, AARP estimates that a typical Social Security recipient who is receiving $20,000 a year when he retires at age 65, by age 70 will have lost $662 in cumulative benefits under a chained CPI than they would have earned under a CPI-W.  By age 80, they will have received $5,248 less; and by age 90 they will have lost $14,076 in cumulative payments.

Remember, the CPI-W is already less generous than the CPI-E which many advocates for seniors believe we should be using instead.  To go from a CPI-W to a chained CPI could be devastating for the majority of seniors who will continue to fall behind inflation during the portion of their lives when they may be facing high expenses for medical and personal care.  By the time seniors have been retired 15 or 20 years, very few of them are able to work and recoup the amount of income they are losing to inflation. 

If we Baby Boomers allow this change in the way our future cost-of-living increases are calculated, we could face a very difficult time during our retirement years.  ARRP suggests that everyone who is concerned about this issue write to the President, your Senators and your U.S. Representatives before this change becomes law.

If you wish to see how these changes could affect you personally, use the AARP calculator at http://www.aarp.org/whatyoulose

Resources:

http://www.ssa.gov/cola/automatic-cola.htm
http://www.ssa.gov/pressoffice/pr/2013cola-pr.html
http://www.ssa.gov/pressoffice/factsheets/colafacts2013.htm
http://www.bls.gov/cpi/
http://news.firedoglake.com/2012/10/16/social-security-cola-increase-for-2013-1-7/
http://www.aarp.org/politics-society/advocacy/info-02-2013/the-chained-consumer-price-index-explained.html

If you are interested in reading more about retirement planning, check out the index articles listed below.  Each one contains some general information as well as links to other articles on that topic.

Gifts, Travel and Family Relationships

Great Places for Boomers to Retire Overseas

Great Places to Retire in the United States

Health and Medical Topics for Baby Boomers

Money and Financial Planning for Retirement

You are reading from the blog:  http://baby-boomer-retirement.blogspot.com

Photo of U.S. Capital Building courtesy of www.morguefile.com