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Is your retirement check shrink-proof?
Thursday - 4/11/2013, 2:00am EDT
Unlike most private sector pension plans, both Social Security and federal-military retirement benefits are linked to inflation.That is a very good deal.
That means that when the cost of living goes up, those retirees get a cost-of-living adjustment. If the cost of living goes down they don't get any increase, nor do they take a cut. It is a one-way escalator.
People who get benefits under Social Security and the old Civil Service Retirement System get a full COLA each January, if inflation rises. Those under the Federal Employee Retirement System frequently get a COLA that is one percentage point less that actual rate of inflation. But...
That would all change under the budget plan presented yesterday by President Barack Obama. He is proposing that Congress use a different yardstick to measure inflation. One that many experts say would reduce future COLAs by 0.3 percent each year, every year. Over time that would be a lot of money. A lot less for retirees, and a lot more that the government could keep for use elsewhere.
The White House made it official yesterday that it wants Congress to use the so-called "chained CPI" method to calculate the rate of inflation. Critics of the current system say the Consumer Price Index in use overestimates the increase in prices for the market basket of goods the government uses to determine inflation. That means retirees are, and have been, getting bigger raises than required to keep pace with actual inflation.
The chained CPI is better, and fairer, backers say, because it takes into account the fact that when times are tough, and prices for things like gasoline and food go up, most people adjust by driving less and/or buying less expensive substitutes: like hamburger instead of steak.
If you carry out the downward adjustment theory, some would argue it means that as prices continue to go up — food, petrol, whatever — people would eventually give up things like vacations and driving and, eventually, stop eating period. That's a tad harsh, but you get the idea.
Suffice it to say, groups that have been staunch supporters of President Obama — groups like most federal and postal unions — are quietly and not so quietly flipping out. The chained CPI alternative has been around for years. But nobody ever dared put it forward. It never went beyond the proposal stage. Now it has.
Many economists endorse the chained CPI system. Both as a way to save money and, in their view, to more accurately reflect real inflation. Courageous newspaper editorials will endorse it, even though a huge number of Americans (one in six?) get some kind of Social Security or civil service-military retirement benefit. They will say that is a gutsy move on the part of the administration because as most up-for-reelection politicians know, Social Security is the high-voltage third rail of American politics.
Why the chained COLA now, after all these years? For one thing, there is the debt problem. For another, this is the second, and last, term. Second terms are traditionally — and strategically — the time when presidents can take unpopular steps and propose things they wouldn't have dared bring up before.
Whether you think the chained COLA is a rip off of the elderly or good for the country, it has a very good chance of becoming law this year. Which raises several questions:
- What do people who would be impacted by it think of it? Check the comments section to this column
- What would it do to your current or future retirement benefits? Click here, plug in your numbers and then stand back
NEARLY USELESS FACTOID
Compiled by Jack Moore
Johnny Cash's country favorite "A Boy Named Sue," was written by Shel Silverstein, the author of children's books classics, such as Where the Sidewalk Ends and The Giving Tree.
(Source: Mental Floss)
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