Current Social Security recipients will find a special Christmas gift via Uncle Sam: a significant rise in their monthly payouts, or COLA (Cost of Living Adjustment). As investors.com reports, “Estimates of the 2022 COLA to benefits are about 6%,” which “would be the biggest benefits hike since the 7.4% increase in 1982.”
Unfortunately, the increase will amount to a metaphorical lump of coal for seniors, because despite this significant increase, retirees will likely see very little benefit at all.
That’s because the increases are nothing more than the government attempting to shore up the massive inflationary pressure eating away at our spending capacity. The Motley Fool points out:
“This inflation is expected to continue into next year — and it will have consequences. Retirees will see much higher Medicare Part B premiums in 2022, with the Congressional Research Service estimating a 6.2% premium increase and monthly costs jumping from $148.50 to $157.70. Most retirees pay premiums out of their Social Security checks, so they’ll find that some of their raise disappears even before it hits their bank accounts.”
Moreover, the COLA increase does not take into account how seniors allocate their dollars. For seniors, spending is primarily on housing, and then increasingly on health care due to chronic medical conditions, such as heart disease, Alzheimer’s, and diabetes.
According to a Fidelity Retiree Health Care Cost Estimate, “an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement.” Moreover, a report by the Employee Benefit Research Institute (EBRI) indicates, “Health-related expenses occupy the second-largest share of total expenditure for those ages 75 or older.”
For those seniors that do not have significant personal savings beyond Social Security, this can lead to incredible financial stress. This slow erosion of purchasing power has been in the making for a while.
In fact, Motley fool states, “Over the past two decades, retirement benefits have actually lost about 30% of their buying power because COLAs haven’t been large enough to enable seniors to keep up. Retirees are starting from behind, and even the 6% COLA this year likely won’t be enough to account for the actual cost increases they face in 2022.”
A particular concern is an increase in the cost of Medicare premiums for Part B under Social Security. Premiums have been rising for years, eating up the income seniors get from their payouts. A recent report by the Center for Retirement Research at Boston College found “To the extent that premiums rise faster than the COLA, the net benefit will not keep pace with inflation.”
Making matters is the disconnect between inflation, Medicare, and Social Security’s use of the Consumer Price Index (CPI), the measure they use to gauge inflation. As Money Talks News highlights:
“The thing is that Part B premiums aren’t tied to the Consumer Price Index, the federal government’s system for gauging inflation, like the Social Security COLA is. These premiums are tied to the Medicare program’s per-person cost, which has been rising faster than overall inflation.”
This dynamic, when combined with rising food, housing, and transportation costs, mean that a significant amount of seniors will struggle to live a semblance of a comfortable life. And while we have all been reading that the inflation we are witnessing is ‘transitory” and related to a “post-COVID 19 surge” rather than reckless government spending, not everyone is feeling so assured.
Former Obama Treasury secretary Larry Summers has gone on record that all of the printing and distribution of money at the federal level is “overheating” the economy and will potentially set in motion inflationary disaster. Summers states, “These figures and labor market tightness and the behavior of housing markets and asset prices are all rising in a more concerning way than I worried about a few months ago. This raises my degree of concern about an economic overheating scenario. There are huge uncertainties in the outlook, but I do believe the focus of concern right now should be on overheating.”
This “overheating” effect is really fancy way of saying there is way too much money sloshing around in the economy, essentially debasing the value of the dollar. This debasing phenomenon is known as the Cantillion Effect, named after Richard Cantillion, an Irish economist of French descent.
Cantillion saw money printing (ie. federal spending in excess of actual tax receipts) as akin to flooding a river with an excess of water, as when occurs during a massive storm. As Cantillion wrote, “The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled.”
The implication, then, is that inflation is much more than simply prices rising. Instead, when the inflationary waters flood the economy, they dilute earning and spending potential by devaluing the dollar.
The Adam Smith Institute explains it this way: “Inflation is not simply an average rise in prices. Prices do not rise proportionally or simultaneously. This results in arbitrary benefit to some who have not created any economic value and detriment to others who have not destroyed anything of economic value by destroying savings for example.”
An even uglier reality is that inflation, ironically caused by spending on people at the bottom of the economic ladder, ultimately favors the wealthy. The conditions are created through a series of economic bubbles, buoyed by a fiat currency that is continually debased by measures such as quantitative easing and out-of-control deficits.
As Lew Rockwell alerts us: “But one thing the US authorities could not wish away is the difference between a national currency and true money, the latter not being the product of credit creation. The benefit of a currency, to the issuer at least, is that it is the vehicle for transferring wealth to the government, its cronies, its licenced banks, and their favoured customers. Without currency, a government is severely limited financially.”
It gets a little scary when you consider the number one weapon that the Federal Reserve has at its disposal to tame inflation, which is the interest rate. By increasing the interest rate, the Federal Reserve puts a squeeze on the dollars sloshing around by impeding the flow from banks. Roughly speaking, a higher interest rate discourages borrowing, which decreases lending, which in turn reduces the money supply. However, that approach is fraught with problems.
To begin with, when loans are less available, businesses either do not grow, cut back their workforce, or in the worst-case scenario, go out of business. All of this has a chilling effect upon the economy, hampering GDP, and ultimately causing unemployment and lower wages.
Worse still, these effects will severely impact seniors, many of who are already vulnerable. The Association for Mature American Citizens warns, “While job worries will grow and corporate taxes get passed to consumers with less purchasing power, the real hit will be on Americans with variable interest rate loans – including mortgages and credit cards – and those living month to month on fixed incomes – chiefly seniors.”
So, while the government tries to buy us with COVID-19 payments, infrastructure spending, and COLA increases, the lump of coal they just gave seniors may not be enough fuel to get them through the cold winter months, if not years, ahead.