I've always said that your Social Security check is safe, no matter what they say about the deficit and the debt and the Trust Fund and default .... BUT what is not safe is what you will be able to buy with your check. The unspoken plan is to "rob" you through inflation.
When the financial crisis hit there were winner and losers. By the time the dust had settled the winners and losers had changed. For all intents and purposes the rich have won and the rest of the population have been handed the bill. In very simple terms those with capital have seen it preserved (nice bounce for the stock market), those with savings have been robbed (almost no interest), and those with debt ... well that depends on the debt and what it was used for. The nation as a whole has taken on debt at unprecedented rates and will be stuck with the bill for generations.....
The situation for retirees and those about to retire is mixed, but for the vast majority of people it is not looking good.
The winners: The winners (or at least not losers) will be those with savings invested in the stock market (for now, though we may yet be looking at another bubble). Now of course most investment advisers will tell seniors and those approaching retirement to reduce equity holdings to avoid risk ... so if they are following advice most seniors will not be in the "heavy on stocks class" ... and so by definition, not the winners.
The rest: If you are relying on a pension plan or Social Security or deposit savings, this is you. We are seeing the beginnings of a wave of inflation that will increase your cost of living, but that will not be compensated for by higher pension/Social Security checks. So too the interest you receive on your savings will be below the real rate of inflation (that you personally experience).
Inflation: If you only look at the news you will hear that inflation is still low and you have nothing to worry about. If you actually buy things that you need to live, you know that this is not the truth. Why the disconnect?
For Social Security purposes the government uses the CPI-W data series (see http://www.bls.gov/... for breakdown).
First there are a number of problems with how the government calculates inflation - and these have been well documented (for example if you can buy an i-pad this month for the same price as last month, but it has say more memory then the price is calculated as having gone down, or if steak has gone up in price but not hamburger, it is assumed that you will eat more hamburger). But the biggest problem is that about 40% of the CPI relates to housing/shelter and I don't think anyone has ever figured out a good way to do this that is fair to everyone (renters, those with underwater mortgages, those with no mortgage) - and at 40% it is a huge chunk of the index.
For 2011 there will be no net Social Security costs of living increase. http://www.msnbc.msn.com/...
Millions of retired and disabled people in the United States had better brace for another year with no increase in Social Security payments.
The government is projecting a slight cost-of-living adjustment for Social Security benefits next year, the first increase since 2009. But for most beneficiaries, rising Medicare premiums threaten to wipe out any increase in payments, leaving them without a raise for a third straight year.
David Certner of AARP estimates that as many as three-fourths of beneficiaries will have their entire Social Security increase swallowed by rising Medicare premiums next year.
Now if there is anyone out there that thinks their cost of living has not gone up overall over last year I would love to hear your story (okay - maybe if your mortgage was renewed at a lower rate). From the latest data CPI-W is up 3.0% March 2011 over March 2010 - but up 3.9% if you exclude shelter (yup ... shelter costs are up only .8%, thereby reducing the overall increase).
Where is real inflation?: Many will think that 3% inflation is not too bad ... but it is very likely to get worse. Since the financial crisis hit the Fed has been flooding the financial system with liquidity - and with QE1 and QE2 with lost of newly printed money. Now any first year economics student will tell you that money printing "eventually" leads to inflation ... but so far we have not seen too much. Sure commodity prices have gone up (from corn to wheat to copper), and oil prices have gone up, but at the store ....
Two things are going on. First companies have been very creative at "hiding" price increases. Almost every time I go grocery shopping I find another product that has had its packaging redesigned (so that you get less for the same price). Second it takes a while for prices to filter through the worldwide supply chain.
http://www.nytimes.com/...
As retailers have been warning, their costs are rising as cotton and other materials get more expensive, laborers in China demand higher wages and fuel prices go up. By this fall, many have said, they must charge customers more. Because retailers pay for items about six months in advance, spring merchandise on the shelves for a few months was ordered and paid for in late summer, before costs soared.
Now prices are starting to quietly creep up ... but you can see more coming. Since cotton prices are higher and Chinese wages are higher, ultimately clothes prices will work higher. In truth the rise in Chinese wages signals the end of a 10 year decline in prices of "stuff" that has helped Middle America survive declining wages.
While virtually all retailers have said that prices will climb in 2011, across-the-board price increases have not yet been reflected in the Consumer Price Index. In March, apparel and jewelry prices were 0.5 percent below where they had been in February, the Bureau of Labor Statistics said.
“In a way, that’s not a bad strategy because their customer is less likely to have sticker shock when they really have to ratchet up come the third quarter,” he said.
Why Why Why? The Fed has taken the "extend and pretend" route to try to deal with the financial crisis. "If we keep feeding the economy with enough money eventually things will turn around". The Fed response is actually designed to create inflation (really!!!!). The problem is that once started inflation is a fire that is very very difficult to snuff out.
For seniors: Unfortunately the story does not look good. Inflation IS coming. It will not be picked up accurately by the CPI-W (which will be too low, and will not reflect a typical senior's costs). Interest rates will remain below inflation. All bad things.
The "decline" in purchasing power will not be sudden. It will be slow, a bit each year, but continuing year after year after year. And that is how they will steal your Social Security check - legally and without a fight.