The Social Security Inflation Lag Calendar – Partial Indexing – Part 1

Out Of Money By December 12th – Social Security Partial Inflation Indexing – Part 2 

Out Of Money By November 29th – Social Security Indexing – Part 3

Medicare premiums are already eating Social Security inflation indexing from the inside, there have been effectively no real increases in net Social Security benefits for those 65 and over in recent years. And we are just getting started.

Experts agree that the Medicare program has far worse expected financial problems than Social Security over the long term. What is little understood, however, is that Medicare premiums are the back door whereby the health care expenses of an aging nation consume the individual standards of living that can be provided by Social Security. This process can entirely change our personal standards of living in retirement and needs to be fully taken into account when making financial planning decisions.

In this fourth analysis in a series, we are going to for the first time combine three levels of obscure technicalities to calculate the precise numbers for something that is not being reported upon enough – but that many millions of people are actually experiencing in their lives right now. When we combine all three factors of inflation lags, index mismatches, and rising Medicare premiums, the average retiree has already lost almost two weeks of the annual purchasing power of their Social Security benefits net of Medicare Part B premiums, just between 2015 and 2017.

If recent trend lines continue, the average retiree in the United States will lose a total of 3 weeks of the purchasing power of their net Social Security benefits by 2019, and more than a month of purchasing power by 2022 (relative to the purchasing power of net benefits in 2015 with no inflation lags).

By 2024 if a retiree on a tight budget needed 12 full months of income to pay 12 full months of expenses – they will instead be running out of money by November 21st of that year.

What is explored in this Part 4 analysis could be called a somewhat ironic generational knowledge mismatch when it comes to how Social Security actually works. On the one hand we have tens of millions of people in their 40s, 50s and early 60s who are earnestly making retirement plans based on the conventional assumption of the full inflation indexing of Social Security benefits.

On the other hand we have many millions of people in their late 60s and older who have been actually collecting Social Security benefits while paying Medicare premiums in practice – and they understand full well how broken the inflation indexing of Social Security has been in recent years.

As will be demonstrated in this analysis – which is based entirely on official government statistics and their extrapolation into the near future – a generation of retirees is currently being slowly impoverished in plain sight. What is happening in real time with actual retirees has not however yet been generally incorporated into conventional financial planning for retirement for future retirees – and it badly needs to be, if genuine financial security is to be achieved.

Highlights Of Previous Three Analyses

As established in the first three analyses of this series, a more complete overview of which is linked here, Social Security is not fully inflation indexed as a matter of design

There are instead two distinct forms of inflation lags as explored in the Part 1 analysis which is individually linked here. We have the lag between when inflation is measured (the light blue bars) and when the first payment based upon that measurement is actually made (the red bars).

And then on top of that we have a steadily decreasing purchasing power for each benefit over the course of the year, which with historically average inflation means that the December benefits are likely to have a purchasing power of only 95 cents on the dollar.

In the Part 2 analysis which is linked here, we examined the mismatch between the widely reported CPI-U inflation index and actual gross Social Security increases in practice, which are based on the much less reported CPI-W index and the particular methodology used by the Social Security Administration. We found there was a slight mismatch between 2015 and 2018, with gross Social Security Benefits increasing at an average of 0.75% per year, and lagging the CPI-U for those measurement dates by 0.47% per year.

If recent history were to repeat itself with very low rates of inflation, this index mismatch in combination with inflation lags would still be sufficient to cost the average retiree almost 3 weeks of purchasing power by the year 2024, relative to the inflation-adjusted value of benefits in 2015

In the Part 3 analysis which is linked here, we moved to a historically average rate of inflation of 3.5%, allowed for still mild 0.60% mismatch between the growth rate in retiree expenses and the benefit increase methodology used by the Social Security Administration, and looked a full 10 years and 20 years into the future.

We also further developed the base Social Security purchasing power pattern shown above, with (1) the green stair step pattern of annually increasing benefits on a nominal basis (not adjusted for inflation); (2) the red saw-tooth pattern of real purchasing power when inflation lag losses are taken into account; and (3) the growing yellow area of cumulative purchasing power losses from the mismatch between the growth rate of retirement expenses and Social Security indexing. Because purchasing power losses are the sum of inflation lag losses and index mismatch losses, (4) a downwards zigzag pattern is created, with the bottom edge showing the monthly purchasing power of Social Security benefits over ten years.

As determined in that analysis, even these quite technical adjustments are sufficient to reduce the purchasing power of gross Social Security benefits by more than a month within 10 years, meaning that those on a tight budget for whom Social Security is most or all of their income, would have to find ways of covering 12 months of expenses with effectively only 11 months of income to work with.

Recent Benefit Increases & Medicare Part B

There is however a basic current issue, as most current Social Security recipients who are over the age of 65 are well aware of, but which those who are younger may not have spent much time thinking about.

The above graphic shows actual average gross Social Security monthly benefits from 2015 to 2018 (for an average 2017 recipient). Benefits started at $1,373 in 2015, there was no increase in 2016, there was a 0.3% increase in 2017, and then a 2.0% increase for 2017 brings the average monthly benefit up to $1,404.

This $31 increase in monthly benefits has been slow to arrive, but it is positive, and on average there have been0.75% annual increases for the years 2016, 2017 and 2018. It was this 0.75% number that produced the 0.47% annual mismatch when compared to the CPI-U inflation index, that was examined on a smoothed basis in the Part 2 analysis.

There is a problem, however, as most current Social Security recipients are well aware. More than 70% of total Medicare recipients have their Medicare Part B premium deducted from their monthly benefits. There are some advantages to doing so having to do with both convenience and the “hold harmless” provisions.