How much would individuals lose — in retirement benefits — if the government used a different formula to keep track of inflation?
The answer, according to financial planner Arthur Stein, is a lot. Especially as compounded over time.
To help trim the deficit, the White House has proposed using a different system — called the chained Consumer Price Index — to calculate the rate of inflation. With the C-CPI as the yardstick, Stein estimates that “after 20 years their annual annuity payment is 5 percent less than it would have been” under the current formula, “and the total value of payments received over that 20-year period is 2.8 percent less.”
Confused? Me too. Anything to do with math turns my otherwise razor-sharp brain to mush. Which is why Stein is going to be our guest today at 10 a.m. on our Your Turn radio show. He’ll explain the impact of compounding on Social Security and civil service retirement benefits, and what the newly proposed system would do to your annuity benefit in the future. He’ll also talk about investing strategies for the TSP in the currently very hot stock market.
Everyone agrees that switching to the chained CPI system would save the government money. Lots of comment on it from lots of people including this:
“Last week you wrote a column which said: 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.
“Many retirees are already living under the poverty line. The chained COLA will hurt those individuals. They will go from eating hamburger to eating beans and rice, and rice and beans. How much pain do we want to cause? Social Insecurity was never meant to offer a full retirement only so retirees and disabled individuals would not starve to death.
“We do not promote saving for retirement in this country, just spend, spend, spend (70 percent consumer economy). This is why we have had a negative savings rate. Only half of Americans invest in the stock market and many do not have pensions any more. Many will be in a world of hurt in their retirement. I do not want to be part of this crowd! Keep saving and investing in the future…” — Emily in Washington State
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