Retirees on Social Security will receive a 3.6% increase in their monthly Social Security checks in 2012. For those who aren’t yet eligible for Social Security (myself included), do our future Social Security benefits also increase by 3.6% due to this cost of living adjustment?
The short answer is no. All else being equal (no changes to the law, etc.), projected benefits will increase by only 2.36% in 2012 for the rest of us.
If you are eligible for Social Security or if you are already drawing Social Security, your benefits increase by an inflation index Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If you are not yet eligible, your benefits increase by the National Average Wage Index (AWI).
CPI-W measures prices. AWI measures wages. Prices and wages don’t go up or down by the same percentage.
Wages usually go up more than prices due to increase in productivity, but that’s not always the case. If non-labor input prices go crazy, there will be high inflation but wages may be held down due to high unemployment.
When that happens retirees will receive a large cost of living adjustment (COLA) but taxes from those who are still working won’t increase as much, causing more strain to the system. Meanwhile the projected benefits for the employed will also increase more slowly than the benefits to retirees. Further more, the cost of any Social Security “reform” will undoubtedly fall largely on the shoulders of the employed, leaving retirees and near-retirees protected.
We may be in or entering such a period right now. Unemployment is high but inflation isn’t that low. Inflation is running at 4% a year in the last 12 months while unemployment stays above 9%. Inflation adjustments automatically kick in for those receiving benefits but the taxes from wages have a hard time supporting such increases.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
Would tying social security payments to the AWI help the problem, or make it worse in the long term?
From what I understand, real wages have been in decline for 30 years…
Harry Sit says
@nick – I think tying the COLA to the lower of the two indexes would make it a more balanced social contract between generations. If wages are growing faster, seniors get their COLA. If wages stagnate, seniors tighten the belt too.
Cherleen @ yesiamcheap says
My parents taught me that it is not good to depend on Social Security and IRA for your retirement. I am thankful to them that they taught us how to handle our finances while we were still young.
I think we need to save enough retirement money so that we do not have to turn to Social Security. Honestly, I don’t know how much of Social Security will be left when I retire so I would not count Social Security income as part of my retirement planning. Anything from Social Security would be just extra income, which is always good.
Interesting perspective, did not realize this. With inflation likely to continue its upwards trajectory, better to be a retiree than a worker I guess.
Linda Brown says
I am on Social Security but I worked fifty years and even worked before paying into medicare even was started. I feel I paid my dues and I would still be working if the company I worked for had not cheated me out of the compensation I was due for getting hurt on the job. I broke my back and had no other choice but to get social security. It is hard to live on a fixed income but it is better than starving and living in a card board box. No it is not free I am almost past going because of an accident I had no control over and no help when it happened except social security.