Any consistent readers of this blog (all three of you) know that my favorite inflation-themed conspiracy goes like this: the government wants the actual inflation rate to be considerably higher than the reported inflation rate. This keeps tax revenues flowing while minimizing payments on inflation-linked expenses such as social security and interest on TIPS.
Here’s a great example: the yearly cost of living increase for social security will be 2.3% this year. From the Washington Post:
Social Security benefits for nearly 50 million people will rise 2.3 percent starting in January, the smallest increase in four years. The typical retiree will face the challenge of using the extra $24 to cover higher costs for everything from gasoline and food to medical care.
The increase is the smallest since a 2.1 percent boost in 2004 and is a full percentage point lower than the 3.3 percent adjustment for 2007. In 2006, benefits rose by 4.1 percent, the biggest gain in 15 years.
The adjustment is based on the change in consumer prices from this July through September compared with the same three-month period last year. Benefit payments have been tied to inflation since 1975.
In the past two years, retirees have benefited from the timeframe the government uses to set the adjustment for the next year. The 2006 increase picked up a jump in energy prices from that occurred in September 2005, reflecting the impact of Hurricane Katrina on production at Gulf Coast refineries.
This year, however, retirees may be penalized because energy costs, which moderated over the summer, are expected to pick up again during the final three months. In addition, food prices and medical prices have climbed rapidly.
But those gains have been offset somewhat by moderation in categories of goods that older people to buy less; they include computers, consumer electronics and clothing.
“Retirees are going to feel a disconnect this year between the COLA increase and the reality of the inflation they face,” said Mark Zandi, chief economist at Moody’s Economy.com. “If this calculation were done in another three months, it would be measurably higher.”
Advocates for the elderly said the small increase highlighted the need to revamp the cost-of-living adjustment to better reflect prices paid by retired people, including the money they spend on health care.
The Senior Citizens League said a study it has done showed that in eight spending areas, people over age 65 have lost 40 percent of their purchasing power since 2000. This finding reflects factors such as big increases for gasoline, home heating oil and prescription drugs.
This is really good stuff! A big chunk of the consumer price index is made up of “computers, consumer electronics and clothing” — the senior citizens that rely on social security as their primary source of income are not buying computers, consumer electronics and clothing, they are buying health care, food, fuel and shelter!