I have some advice for anyone who dares to write about the latest Social Security cost-of-living adjustment: Don’t.
I made the mistake of nevertheless devoting a Retirement Weekly column to this subject, and received perhaps more vitriolic email than I have for any other single column since I began writing for MarketWatch in 2002. At the nicer end of the spectrum were those telling me that I simply didn’t know what I was talking about. At the other end were those predicting I would be reincarnated as a gross insect inside an inaccessible body part. And it went downhill from there.
You’d think I’d have learned my lesson. But I am going to revisit the issue anyway, hoping to set the record straight.
For starters, let me emphasize that I am not arguing that Social Security benefits are enough to live on. The focus of my earlier column was on whether the cost-of-living adjustment (COLA) was a fair reflection of the inflation that the average retiree has experienced. That’s an entirely separate and distinct topic.
So, please, don’t send me any more of your monthly budgets asking me how you are supposed to live on what you get from Social Security.
My main argument in the earlier column was that many critics of the latest Social Security COLA were confusing nominal with real (or inflation-adjusted) payments. Yes, the COLA for 2020—at just 1.6%—is lower than in many prior years. But so is inflation lower. On an inflation-adjusted basis, the average retiree should be no worse in 2020 than he would have been in a prior year in which inflation was running at a double-digit rate and so was the COLA.
So focusing on the headline number of Social Security’s COLA is not very helpful.
One thing I didn’t write about in my earlier column, but is important to provide context, is how rare, and valuable, it is that Social Security has inflation-adjusted in the first place. Andy Landis, author of “Social Security: The Inside Story,” and a former Social Security Administration representative, told me in an email that “COLAs are extremely rare in the pension world. Most pensions are a fixed dollar amount for life. Their buying power shrinks and shrinks as the years go by.”
COLAs are also rare in the annuity market. There is only one firm in the ImmediateAnnuities quote finder that even offers inflation-index annuities, for example. And it charges a lot for hedging against inflation.
Consider a hypothetical 65-year old single male investing $100,000 in an immediate annuity. The best deal available at ImmediateAnnuities for one that is not indexed to inflation pays $525 a month for the rest of his life. To get an annuity indexed to the consumer-price index, the best you can get is one that pays just $323 a month—only 62% as much.
So while many of you are probably in no mood to be outright thankful that Social Security even has a COLA, you shouldn’t forget that—in at least this respect—you are better off than many, perhaps most, pension holders and owners of annuities.
As I did mention in my earlier column, a legitimate criticism of Social Security’s COLA is the measurement of inflation it uses to calculate the adjustment. It currently uses the regular consumer-price index (known as CPI-U), even though it has developed over the years a separate version of the CPI that reflects the unique expenditure patterns of retirees. This alternate version is known as CPI-E.
Though there is much support for legislation that would direct the Social Security Administration to start using the CPI-E as the benchmark for determining its COLAs, you should not exaggerate the impact of such a change. Over the last several decades, for example, the CPI-E has risen by 0.2 annualized percentage points faster than the CPI-U. Had the CPI-E been used over the last 20 years, the average Social Security monthly benefit would be about $60 more than it is currently—around $1,520 instead of $1,461.
While that difference is better than nothing, it will not solve the budgetary woes that so many of you presented me with after my previous column on this subject.
All of which leads me to reach the same conclusion I did then: If you believe Social Security benefits should be higher, then you should be making that argument directly, rather than urging the increase in the name of inflation adjustment.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. Hulbert can be reached at mark@hulbertratings.com.