What Will Happen To Social Security?

Like several million other Americans who depend on Social Security for retirement income, I recently received an official notice from the Social Security Administration. Starting in January of 2013, we will be receiving a 1.7% increase in our Social Security benefits. Theoretically, it has been determined, consumer prices have increased by 1.7% in one year based on the Labor Department’s Consumer Price Index (CPI).

This increase in Social Security benefits will NOT keep up with the cost of living. Medicare deductions from the planned increase in benefits will go up 5% in 2013, reducing the net increase in benefits to 1.5% (your percentages may differ based on your monthly benefit). We must also remember the DOL CPI (despite the name) is NOT a price index. It is a cost of living index that makes broad assumptions about consumer spending. (Note 1)  The price we pay for housing, goods and services may go up far more than 1.5%.

The US Department of Agriculture, for example,  projects food at home prices will increase by 2.5 to 3.5% in 2012, and are projected to increase by another 3.0 to 4.0% in 2013. It should be noted the USDA data in the following table IS based on a price index.

USDA Projected Changes in Food Price Indexes for 2012 and 2013

Data as of 12/18/2012

	Importance %	2012 Forecast	2013 Forecast
Food at home	100	2.5 to 3.5 %	3.0 to 4.0 %
Meats, poultry, and fish	21.4	4.5 to 5.5	3.0 to 4.0
Eggs	1.3	2.5 to 3.5	3.0 to 4.0
Dairy products	10.6	2.0 to 3.0	3.5 to 4.5
Fats and oils	3.0	5.0 to 6.0	2.0 to 3.0
Fruits and vegetables	14.9	-2.0 to -1.0	3.0 to 4.0
Sugar and sweets	3.5	2.0 to 3.0	2.0 to 3.0
Cereals and bakery products	14.4	2.5 to 3.5	3.0 to 4.0
Nonalcoholic beverages	11.1	1.5 to 2.5	2.5 to 3.5
Other foods	19.7	3.0 to 4.0	3.5 to 4.5

 Although the U.S. Energy Information Administration projects that oil fuels will go up by 7.2% in 2012, they will decline by 3.1% in 2013. Natural gas prices will increase by 4.7% in 2013, and electricity prices will increase by 1.6%.

Various forecasts project the price of rental and purchase housing will increase by 1.5 to 3.5% in 2013. If the economy picks up, as some believe, then the monthly cost of rental and purchase housing could increase by more than 3.5% in many markets.

Taken in the aggregate, consensus economic forecasts project inflation will increase by 1.8 to 2.2 percent in 2013. This – versus an increase in Social Security benefits of 1.5 percent - net of Medicare. Real prices will increase faster than Social Security benefits in 2013.

And that’s the good news.

Barack Hussein Obama and certain members of Congress want to change the way Social Security is calculated by going to what is called a “chained” index. This will have the effect of further reducing annual Social Security cost of living increases. If he gets his way, sub-par Social Security benefit increases are destined to be baked into the system.

And that is (still) the good news.

I firmly believe the rate of inflation for consumer goods (food, fuel, clothing, etc.), and services (electricity, maintenance, public transportation, etc.) will exceed 2.2% in 2013, and accelerate before the end of 2014. If this happens, cost of living benefit increases for 2014 will fall further behind the actual prices we pay for goods and services.

And that is (whew !) not the really bad news.  Want the really bad news?

America is in danger of entering a period of higher inflation for interest rates, taxes, and consumer current expense purchases, accompanied by a deflation of stock market, bond, and certain fixed asset values. Increasing interest rates will increase the annual cost of public and private debt. Strapped for cash, Washington will have to make serious changes to Social Security – including the calculation of annual benefits. If inflation gets out of hand (possible), then there will be talk of scrapping Social Security in favor of a minimalist welfare entitlement program. Look for politically expedient talk about “leveling the playing field”. Translation: Washington may have to make serious changes to Social Security.

In any event, the future of Social Security has been decided. Benefits are NOT going up as fast as the prices we pay for the stuff we buy.

TCE

Note 1: The CPI is a cost of living index that routinely fails to keep up with changes in the price we pay for housing, goods and services. To see what this index does track, click on http://tinyurl.com/aanq6d5  for more information.