President Obama’s Chained CPI and Its Impact on Your Savings
By Dennis Miller, Editor, Money Forever
This week, we’re exploring how inflation steadily erodes your retirement income, particularly in light of the President’s proposal for Chained CPI adjustments to Social Security. Formally known as the Chain-weighted Consumer Price Index, this is a variation of how the government calculates inflation. Given the low yields from CDs and other “safe” investments, those who fail to take proactive measures find themselves increasingly disadvantaged every year.
Regrettably, statistics show a harsh reality: the era of relying solely on Social Security and a few stable bonds or CDs is over. To achieve decent and sustainable returns, investors must look beyond traditional safe havens.
The adjustments to benefits use the Bureau of Labor Statistics’ (BLS) CPI-W Index, which measures prices for urban wage earners and clerical workers. The rationale behind the CPI-W adjustment is that these individuals, typically on constrained incomes, tend to be more budget-conscious, much like retirees.
This reasoning has merit; however, retirees may incur higher expenses in specific categories. For instance, older adults generally spend significantly more on healthcare while purchasing fewer new clothes. The saying, “I’ve got socks older than you, kid,” reflects this reality.
Inflation Gradually Erodes Social Security Benefits
While the Social Security Administration claims to use the CPI-W for inflation adjustments, the BLS does maintain a separate index for individuals aged 62 and older, known as the CPI-E. This index places more emphasis on expenditures like healthcare and less on other costs.
The BLS is somewhat reticent about the CPI-E, as it reveals a troubling truth. In fact, accessing this data online is not an option; one must call the BLS directly to obtain it, which is unusual for an agency that provides so much data online.
Although the average annual difference between inflation rates for seniors and Social Security adjustments is about 0.58 percent, over time, this modest figure compounds. Over the past 29 years, it has resulted in a 16.7 percent decrease in purchasing power. Given that the average life expectancy in the U.S. is 78.5 years, an individual starting Social Security benefits at age 65 can expect a 7.8 percent decline in purchasing power during their lifetime.
Government representatives often assert that Social Security adjustments account for inflation. In reality, they are adjusting based on an index that aims to track inflation. If this index is inaccurate—as our research suggests—purchasing power will also be miscalculated. These discrepancies tend to benefit the government instead of the Social Security recipients.
Minimal Returns from Bonds and CDs
With the Federal Reserve reducing Treasury rates to near zero, interest rates for other financial instruments, including CDs and AAA-rated bonds, have also fallen. When taking inflation into account, many CDs now offer negative returns. The average Moody’s AAA-rated bond yields only 1.4 percent after inflation. Currently, savers are faced with harsher conditions than almost any time during the recession.
Initially, in 2009, the economy experienced a brief deflationary period that made bonds and CDs viable investments—at least for a time. However, it has since become imprudent to invest in long-term CDs, while investing in AAA-rated bonds is becoming largely futile. Moving funds out of CDs has become not just an investment option but a necessity.
Whether the President implements his Chained CPI or we continue with the current CPI-W, relying solely on Social Security means falling behind financially each year.
The inevitable question arises: “Where should I invest my money instead?”
For a growing number of retirees seeking income, the stock market—particularly high-yield dividend stocks—is becoming the answer. Of course, one challenge is that most dividend stocks disburse payments only quarterly, while bills are monthly. You can’t accumulate bills for three months to make a single payment.
Fortunately, there’s a solution. I’ve recently revamped our innovative dividend investment plan called Money Every Month. As the name suggests, this plan provides you with monthly dividend payments from select stocks. In this plan, I will guide you on setting up your monthly payment plan, which stocks to begin with, and suggestions for those feeling more adventurous. If you’re interested, please read my latest report on the Money Every Month plan: click here.
Sincerely,
Dennis Miller
for Economic Prism
[Editor’s Note: Over his career, Dennis Miller has worked with various Fortune 500 companies, training countless executives to effectively communicate the value of their products. His multinational clients include GE, Mobil, Shell, and many others. In 1995, Dennis committed to studying investing, dedicating significant time to learning from investment managers and experts. This led to the creation of his book, Retirement Reboot, and his monthly newsletter, Money Forever, along with his free journal, Miller’s Money Weekly. Dennis advises subscribers on building a resilient retirement portfolio.
