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COLA Social Security lags behind the Federal Reserve's inflation target – Investment Watch


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Since 1975, the Social Security Administration (SSA) has provided automatic cost of living adjustments (COLA), which increase Social Security benefit payments. By 2020, the official adjustment finished up to 1.6%

According to the SSA, this adjustment is "promulgated by legislation that links the COLA with the annual increase in the Consumer Price Index (IPC-W). The change means that inflation no longer drains the value of insurance benefits Social ".

It is good to think that the SSA is doing everything possible to help recipients maintain their purchasing power, especially retirees who depend on payments for most or all of their retirement.

The monthly increase in benefits for 2020 is shown in the table below, taken from the official COLA fact sheet:

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That's an additional $ 24 per month for retired workers, which is not much. Unfortunately, next year may not be better …

According to a Article on CNBC, "The first estimates of The Senior Citizens League, a group of nonpartisan seniors, point to a possible 1.5% increase in COLA by 2021."

But keep in mind that there has been no automatic increase every year:

This is because the COLA is equal to the percentage increase in the IPC-W. If there is no increase, then the COLA is zero. Social Security checks did not increase in 2010, 2011 and 2016.

This means that this initial estimate of 1.5% of COLA by 2021 may not work, as it depends on economic conditions.

But even if some estimate of COLA is correct, would it be helpful?

The main enemies of any adjustment for cost of living is inflation. As you read earlier, the inflation method that the SSA uses to calculate its COLA is known as "CPI-W".

At this time, that inflation rate is officially 2.3%, which is well above the 1.7% of September 2019.

And this increase is intentional, as the president of the Federal Reserve Powell set Last year he was "launching a new rule that would allow inflation to exceed its 2% target to compensate for lost inflation."

It seems that the Federal Reserve will allow inflation to "warm up" towards a new target of 2.5% -3.0% in early 2020. (Of course, this could establish a dangerous preceding.)

Allowing inflation to "warm up" could devastate the value of payments by Social Security beneficiaries, since it could consume any COLA quite quickly, in the form of a dizzying increase in food and energy prices.

That is if you take the "official" inflation rate at face value. But some estimate that "real" inflation is much higher …

According to methodology which was used to calculate inflation in the 1990s, "real" inflation is closer to 6%. If that is correct, that means that any COLA offered by the SSA would not even maintain the current spending levels of retirees. In fact, they would be losing more than 4% of their purchasing power annually.

The SSA does not have the funds to "catch up", now or in the future. In fact, they are more likely to reduce benefit payments in the future instead of increasing them.

Don't wait for your retirement "miracle" to materialize

Price inflation, official or otherwise, will continue to pose challenges to the ability to retire only with Social Security and savings.

Worse, no matter what the official COLA is by 2021, it is most likely not enough to keep pace with inflation.

It is foolish to expect a financial miracle from the SSA. Much better to examine your retirement portfolio and consider adding precious metals, like gold and silver.

Both can act as hedges against inflation. When food and energy prices start to rise, you will want an asset that can help you maintain the lifestyle you have worked so hard for.

COLA, inflation, jerome powell, social security, food

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