“Every time you earn a nickel, someone takes a dime.”
That was my grandmother’s favorite way of complaining about the cost of living in retirement. If I had a nickel for every time I heard her say that, well I’d at least have enough for a McDonald’s Happy Meal.
I was raised by my grandparents. I saw their retirement firsthand. For them, inflation was a meaningful issue. During the late-1970s, when they were entering retirement, inflation averaged around 8.5% per year.
My grandfather, a mechanic and tire salesman, retired without a pension. He and my grandmother (a glorified secretary at a chemical company) had enough to live on, but we weren’t taking vacations and they weren’t buying new cars and clothes and such.
They lived largely on my grandfather’s Social Security, and the meager paycheck my granny earned.
But here’s the thing: As much as my granny complained about the cost of living in the ’70s and ‘80s, she and my grandfather lived like royalty compared to what they would have faced today.
Which gets to the point of this dispatch: the inability to live that American Dream, middle-class life that has long been a hallmark of the American experience.
Back in 1980, when my grandfather was still new to the retiree world, the average Social Security check was $374 a month. Today, it’s just over $1,500. Over the last 41 years, that means Social Security income has increased about 3.5% a year.
Superficially, that would seem to track inflation. Stick $374 in 1980 dollars into an inflation calculator like that one operated by the Bureau of Labor Statistics (the arbiter of inflation data in the U.S.) and it will tell you that the 2021 equivalent is $1,306. So, at just over $1,500, you’d think Social Security has actually topped inflation.
The U.S. government is masterful at data manipulation. Years ago it began using “hedonic” adjustments to pretend that costs weren’t going up as rapidly as they are. Hedonics is the witchy voodoo of guessing at what a price might have been for a product today had the same product of the same quality existed in the past.
A modern car is a good example of this. It comes standard with far more bells and whistles and safety measures than a new car in 1980. That new car today will cost, on average, $40,200. A new car in 1980 was $7,570, on average.
Mathematically, today’s car is 431% more expensive than the new car my grandparents might have bought 41 years ago. But hedonically drunk, governmental inflation witch doctors don’t see it that way. They estimate what part of the price increase is due to better quality—and better quality means prices are adjusted downward.
The result: Inflation all but vanishes numerically.
The government loves hedonics because it tamps down the rate of growth in one of Uncle Sam’s largest expenses…Social Security checks. Let’s return to that $374 Social Security check, circa 1980, to see this in action.
If we use the same inflation measures that government used prior to its addiction to hedonics, what cost $374 in 1980 would today actually cost $7,831.
Not a typo.
Makes that modern, $1,500 average Social Security check seem like a real bargain for government.
And it explains why so many retirees complain about not being able to afford life in retirement these days. The cost increases they face are real, but the data the government uses to calculate Social Security’s annual cost-of-living adjustments (COLA) is based on statistical sorcery.
All this is relevant as we now enter the dog days of summer and approach the fall. That’s when the Social Security Administration traditionally announces the COLA for the coming year.
Jibber-jabber at the moment says retirees can probably expect a raise in the 5% range for 2022, to account for the reported inflation we’ve seen so far this year (which will get worse).
I’m sure 5% will sound grand to lots of retirees, particularly given that over the last 12 years the largest adjustment was 3.6% (in 2011), and that in four of those years, the adjustments were 0%, 0%, 0%, and 0.3%.
Just know this, though: 5% is going to feel a lot like 0%—or worse—as we move forward. The 5% reported inflation has been hedonically adjusted lower, so a 5% COLA will not really cover increased costs. And by the time government gets around to the COLA for 2023…well, inflation could have already touched 10%.
That’s why it’s so important to think about how to maximize your Social Security income.
Don’t settle for that average Social Security income of just over $1,500 per month. Use all the strategies available to you to claim the maximum payout—which for 2021 is $3,895 per month.