Why Inflation's Higher Than It Looks

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Social SecurityLast fall, Social Security recipients got their first raise in their monthly benefit checks since 2009. Yet, if you're like most people, watching the prices of the things you buy go up all the time makes the government's inflation gauge seem out of touch.

But there's a good reason why the government's estimates don't match up with your experience: They aren't designed to.

Like any statistic, the Consumer Price Index, which measures inflation, is only as effective as the assumptions it makes -- in this case, about what you spend money on. If you spend more on certain things than most people, then the CPI will do a terrible job of reflecting the prices you actually pay.

Understanding the Consumer Price Index

The CPI looks at a "basket" of different types of goods and services that the Bureau of Labor Statistics thinks reflects the typical household's expenditures . The biggest category in the CPI is housing, which makes up 40% of the index. Food and transportation each contribute another 15%. The remaining amount is spread across recreational activities, education, health care, and other goods and services.

The BLS specifically says that the CPI won't match up with the experience of any specific individual. But because of the way it's constructed, many people will see some dramatic differences.

What It Means for Retirees

In particular, retirees often don't fit the CPI profile well at all. Many retirees have already paid off their mortgages, and despite still having to cover utility costs, property taxes, and maintenance and upkeep, their spending on their housing needs falls well short of 40%. And declining home prices have only benefited those who didn't own homes prior to the housing bust. Far from getting any benefit, retirees who own their homes have taken big hits to their finances.

At the same time, medical care places an ever-increasing drain on many retirees' finances. Hospital costs have risen at nearly twice the rate of overall inflation in the past 12 months, and over the longer run, health care has seen huge price increases that are straining government programs like Medicare and Medicaid to the breaking point. Yet, medical costs make up only 7% of the CPI -- a far cry from the estimated $230,000-$250,000 that retirees can expect to pay for health-care expenses over the course of their retirement years.

And Then There's the New Threat

Even worse, some are looking to reduce cost-of-living increases in Social Security benefits that are linked to inflation. When the so-called "supercommittee" met last year to discuss ways to cut the federal budget, one proposal suggested using what's known as the "chain-weighted" CPI to calculate cost-of-living increases. According to estimates, using the chain-weighted CPI would save $200 billion over 10 years -- $200 billion that would come from lower annual raises for retirees' Social Security benefit checks.

For now, that proposal doesn't look like it'll become reality anytime soon. But the move was just the latest in a series of arguments about whether the CPI overstates or understates inflation. As the federal budget becomes an increasingly important issue, you can expect to see more attempts to use the CPI as a way to rein in spending in an opaque but very detrimental way for retirees.

What to Do

As you plan for your own retirement, keep in mind that just because government numbers may reflect relatively low inflation in recent years, you can't necessarily count on prices staying low in your own personal budget.

If you do everything you can to build some leeway into your personal expenses, you'll be better able to handle whatever price shocks may come around in the future. With new calls for $5 gasoline, hanging onto every penny you can is only going to get more important in the coming months and years.

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gotlightpro

In 2012 the social security personal income tax is limited to only collecting on the first $110,000 of income. After which no personal income is taxed for social security collection. Why? Why not raise taxation for collecting social security to 100% of personal income. Why not refuse social security payments to retirees whose wealth surpass $100,000.00 per year while retired? Why not have government re-pay all moneys with interest borrowed from the social security fund? Why not collect social security on wealth, bonuses, full disclosure of personal & corporate assets?

March 03 2012 at 2:55 PM Report abuse rate up rate down Reply
gotlightpro

In 2012 the social security personal income tax is limited to only collecting on the first $110,000 of income. After which no personal income is taxed for social security collection. Why? Why not raise taxation for collecting social security to 100% of personal income. Why not refuse social security payments to retirees whose wealth surpass $100,000.00 per year while retired? Why not have government re-pay all moneys with interest borrowed from the social security fund? Why not collect social security on wealth, bonuses, full disclosure of personal & corporate assets?

March 02 2012 at 6:43 PM Report abuse rate up rate down Reply
gotlightpro

In 2012 the social security personal income tax is limited to only collecting on the first $110,000 of income. After which no personal income is taxed for social security collection. Why? Why not raise taxation for collecting social security to 100% of personal income. Why not refuse social security payments to retirees whose wealth surpass $100,000.00 per year while retired? Why not have government re-pay all moneys with interest borrowed from the social security fund? Why not collect social security on wealth, bonuses, full disclosure of personal & corporate assets?

March 01 2012 at 7:08 PM Report abuse rate up rate down Reply
mscb14

Of course there is a problem with Social Security. We have so many legal immigrants coming into the land of the riches that it is ridiculous. Many come here and work for a few years and the next thing they are on disability . And of course if the children are under a certain age, they receive a check also. And not to forget the large amount on the access card for food. Never worked at a job making enough money to pay any taxes but reap it all in. Now back in the old country they have a large bank account and also a house. Take trips back and forth to the mother country (which costs quite a bit). Live here like kings and queens. Whole families are on disability. Smoke a few packs of cigarettes a day and drink a liter of brandy and helf a case of beer. The fore-mentioned is only one of the problems that should be addressed. I won't get into discussing the Senate and Congress perks because it would take way too much of my time. The United States of America is the greatest country in the world to live in especially if you weren't born here.

March 01 2012 at 6:45 PM Report abuse rate up rate down Reply
Cat

Just wanted to thank President Obama and the Senators and Representatives of our great country for taking such good care to keep the "entitled people" (who are perfectly healthy) from eating up our SS.

March 01 2012 at 6:37 PM Report abuse rate up rate down Reply
William Popp

One thing people fail to say is that Social Security was never meant to be a retirement, just a supplement to retirement. I have worked since I was 14. I listened to my parents and planned for my retirement and saved and also did a little investing. We are living ok now, not rich but holding our own. I realize some have been hit with hard times and have been financially hurt. This post is meant for younger people who have a chance to possibly be able to retire with some dignity.

March 01 2012 at 6:12 PM Report abuse rate up rate down Reply
wildwindwarrior

Lets all just be glad we are older and will be gone by the time all this mess really affects us. I know I will be. Thank God that the most Obama will have at the very most is 4 years and 9 months, too!

March 01 2012 at 6:11 PM Report abuse rate up rate down Reply
mscb14

Of course there is a problem with Social Security. We have so many legal immigrants coming into the land of the riches that it is ridiculous. Many come here and work for a few years and the next thing they are on disability . And of course if the children are under a certain age, they receive a check also. And not to forget the large amount on the access card for food. Never worked at a job making enough money to pay any taxes but reap it all in. Now back in the old country they have a large bank account and also a house. Take trips back and forth to the mother country (which costs quite a bit). Live here like kings and queens. Whole families are on disability. Smoke a few packs of cigarettes a day and drink a liter of brandy and helf a case of beer. The fore-mentioned is only one of the problems that should be addressed. I won't get into discussing the Senate and Congress perks because it would take way too much of my time. The United States of America is the greatest country in the world to live in especially if you weren't born here.

March 01 2012 at 5:16 PM Report abuse +1 rate up rate down Reply
rachelpaints

what is flawed isn't the accounting it is how the government, especially under republicans, have raided the fund for the last 30 years. Here's an idea, stop pumping billions a year into black ops, here's another money makers, legalize pot.- oh we can't do that the security state and black ops depends on that drug war money. How about this one, make big corporation pay taxes, stop them from off shoring money and all the other tactics they use to cheat the government. Ever wounder what would happen if the FDA didn't work for the RX industry? There's enough money fro every body's needs but not enough for every body's greed. There are solution but the corporate cronies of congress don't have the permission from their take masters to do any of them.

March 01 2012 at 5:15 PM Report abuse rate up rate down Reply
2 replies to rachelpaints's comment
wildwindwarrior

Woah, there, Cowgirl.... There were some Clinton and Carter years in there somewhere....

March 01 2012 at 6:14 PM Report abuse rate up rate down Reply
Cat

Why so many repeats of your poorly thought out criticism? Are you concerned we won't read your drivel?

March 01 2012 at 6:42 PM Report abuse rate up rate down Reply
rachelpaints

what is flawed isn't the accounting it is how the government, especially under republicans, have raided the fund for the last 30 years. Here's an idea, stop pumping billions a year into black ops, here's another money makers, legalize pot.- oh we can't do that the security state and black ops depends on that drug war money. How about this one, make big corporation pay taxes, stop them from off shoring money and all the other tactics they use to cheat the government. Ever wounder what would happen if the FDA didn't work for the RX industry? There's enough money fro every body's needs but not enough for every body's greed. There are solution but the corporate cronies of congress don't have the permission from their take masters to do any of them.

March 01 2012 at 5:14 PM Report abuse -1 rate up rate down Reply