- In this video, I'm going to discuss with you
what happens to your social security payment
in an inflationary or hyperinflationary environment.
Coming up next, on Holy Schmidt!
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- Many retirees are concerned with what's happening
with inflation.
They see gas prices going up.
They see housing prices going up.
They see costs of goods and services going up.
And the predictability of the drivers of this
are not what they were in the past.
Historically, you could predict
what was happening with prices,
by what was happening with interest rates
and unemployment rates.
Low interest rates and low unemployment rates
often meant that inflation was right around the corner.
This is because people with access to money,
low interest rate money, and a job, a good job,
usually when there's low unemployment,
have a tendency to buy things.
The more they buy, the more prices go up.
The government doesn't want prices to go up.
In fact, they want prices to go down.
They want goods and services provided to the masses
at prices that they all or virtually all can afford.
The government uses interest rates to cool things off
when things get too heated.
If they raise rates, the cost of doing business goes up
and the business has to raise their own prices
in order to cover their costs.
Higher prices means that people buy less
and buying less drives prices back down.
The same is true with house prices.
If the Federal Reserve raises rates,
the value you can get from house payment
starts to go down.
You can afford less house.
Therefore, people buy less houses.
The knock on effect is that if house prices aren't going up,
homeowners feel less rich and they spend less.
So as they're spending less,
the prices of goods and services starts to decline.
Because of the pandemic, the game has changed.
We're going through unchartered territory
when it comes to inflation.
House prices are skyrocketing in the suburbs
and they are plummeting in the cities.
Why?
Because city lifestyle,
access to theater, restaurants,
proximity to the office, et cetera,
has been curtailed by the pandemic.
In some cities, crime is going through the roof,
further exacerbating the problem.
People are leaving for safety reasons.
In other words, home price shifts aren't driven at all
by interest rates.
In fact, the Federal Reserve Bank
hasn't moved interest rates in a long, long time.
It's driven by working from home over the last 15 months.
It's driven by people relocating their families
out to the suburbs and starting a new life
when they realized that things
weren't going to return to normal anytime soon.
Some of them became permanent suburbanites.
Gas prices, a big sign of inflation,
are over $5 per gallon here in New York.
I'm not sure where they are where you are,
but I'm sure you've seen prices go up
over the last 15 months,
maybe even the last four or five months,
to levels that you haven't seen in years.
Free money is in the system with multiple stimulus checks,
big unemployment checks.
The Paycheck Protection Program,
which provides basically free money, forgivable loans
to businesses if they keep their staff on the payroll.
Importantly, there's a lot more to do to get back to normal.
Many travel and entertainment businesses are on their knees.
Some of them are completely out of business
and never coming back.
So now our government and governments around the world
are faced with the decision.
Do we continue to add stimulus
in all forms into the system to get us back to normal?
Or do we worry about inflation?
The bias, globally, is to worry about inflation later
and get things back to normal as soon as possible.
So what does that do to your social security payment?
Well, if inflation happens,
then your cost of living adjustment will adjust.
Let's talk about that.
But before we do, please make sure
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Let's start by talking about the big measurement,
frankly the only one that counts at least for this video,
and that's the Consumer Price Index.
There isn't just one CPI.
There are actually three.
There's CPI-E,
which is the Consumer Price Index for the goods and services
purchased by the elderly.
Not surprisingly, there is a slant towards medical costs
and less emphasis on things like travel and entertainment.
Then there's CPI-U.
This is the basket of goods and services that people buy
in and around the cities.
Last but not least is CPI-W
and that is the basket of goods and services
for urban wage earners and clerical workers.
It also represents what the middle class, more or less,
in this country spends its money on.
And for complete clarity,
the COLA, the cost-of-living adjustment,
is CPI-W.
They are one and the same.
A change to CPI-W is also a change
to the COLA payment that you receive.
It's actually a pretty good catch-all basket
with people doing better or worse,
depending on where they live
and what they spend their money on.
So, here's what happens to your COLA adjustment
when inflation hits, if inflation hits.
Prices will rise.
We're already seeing that now.
The prices of the items in the CPI-W basket
will go up and your COLA payment will go up
lock step with those items.
What are those items?
They range from housing to travel,
to energy, to clothes, to food.
There are a lot of everyday items in that basket
that most people purchase.
Now, to address the elephant in the room.
CPI-W basket is not there to shortchange you.
A lot of people say,
"Why don't I receive the CPI-E basket
when I'm in retirement?"
It's a fair comment,
but also note that CPI-E
is much more important when you're in your eighties
than when you're in your sixties.
And the fact of the matter is a lot of the difference
is between medical costs and travel and entertainment costs,
and they sort of wash each other out.
And the differences is nominal, maybe one tenths or 1%,
two tenths of a percent.
One way or the other.
More importantly, private industry
uses the Consumer Price Index, CPI-W,
for many long-term contracts.
If a business signs a 30 year lease, for example,
they have to inflation adjust the lease payments
every month or every year anyway.
And they'll use the CPI-W basket
in many cases to do this.
The same thing happens with long-term supply contracts.
If I'm a buyer and you are a seller,
you need certainty that 20 years from now,
you're not selling me products at fire sale prices
when you could be selling them for much, much more.
So you build in an inflationary component.
Often, that inflationary component is CPI-W.
To give you an idea of what this means,
over the last 36 years,
the increases range from zero to 14.3%.
Zero was in 2015.
14.3% was in 1980.
Now, what does this mean for you?
Practically speaking, it means that if we do hit
inflationary or hyperinflationary times in the near future,
you're protected, more or less.
Your social security payment is protected
through the cost of living adjustment.
Now, all you have to hope for is that your retirement assets
will grow as quickly and as favorably
as social security will, if we hit high inflation.
By the way, I've included a link below
to the Bureau of Labor Statistics,
so that you can see for yourself with CPI-W is.
They release it monthly.
And the most important one
is going to be the one coming up on your end.
That will be the one in which determines year over year
what your COLA payment adjustment is going to look like.
You'll be able to determine
what the number's going to be before most people,
because you actually know how it's calculated.
If you like this video,
please make sure you click subscribe to notifications.
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Also, check out this video on the average net worth
of people in retirement at age 65, 70, and 75.
This is Geoff Schmidt.
Thanks for watching.