PORT WASHINGTON, N.Y. (MarketWatch) -- For the first time in a generation, Social Security recipients will not get a cost-of-living increase in their monthly checks -- not next year nor the year after.
As you can imagine, this is bad news for the millions of retirees who depend on their Social Security checks for their main source of income.
Most seniors are struggling to maintain their standard of living in the face of soaring health care costs combined with the drop in the stock market, which has decimated their retirement accounts, and the record low interest rates they get on whatever savings they might have left.
Because of the confluence of these factors, seniors had been especially looking forward to next year's cost-of-living adjustment (COLA) to help them cope. Now they will have to figure out how to live on less.
The government has been adjusting their monthly checks for 35 years to ensure that seniors don't wind up eating dog food -- as many were forced to do in the high-inflation years of the 1970s, when Social Security monthly payments were fixed.
But after receiving an increase each year since 1975 to compensate for the rise in the cost of living, seniors won't get a raise in 2010 or in 2011 because the trustees who oversee Social Security are projecting declines in the consumer price index (CPI) -- the basis for these cost-of-living adjustments.
What is more, some seniors in the Medicare prescription drug program will actually see their monthly payments decline because the premiums are scheduled to rise.
In today's low-inflation environment, some might see this as much ado about nothing. After all, seniors did get a one-time payment of $250 last spring. And this year's decline in consumer prices combined with last year's 6% COLA adjustment for 2009 gave many seniors' buying power a lift.
But the issue is more than what happens over the course of this year or next. It has to do with the way seniors' cost of living is calculated.
Understand that the CPI does not measure everyone's cost of living -- especially that of seniors. Their cost of living is mostly affected by what they spend the most money on: food and health care, such as insurance, doctors, prescription drugs, hospitals and nursing homes.
These costs are rising rapidly, as has been pointed out time and again in the intense debate over health care reform. For example, while the CPI may be down, year-over-year, medical costs are actually up by more than 3%.
Indeed, health care costs are one of the few items in the consumer's market basket that did not dip for even one month during the recession. Local taxes are up as well.
Those items that are pulling the CPI down -- lower prices of cars, homes and energy -- don't affect seniors all that much. The same can be said for computers, cell phones and personal digital assistants.
If the government is serious about protecting seniors' buying power, it will base its adjustments on increases in their actual cost of living.
This way seniors will get the real thing -- not a diet COLA.
- Irwin Kellner: 'Diet COLA' for Social Security recipients - MarketWatch
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So why does it affect everyone. Put simply, we all must realize that we cannot depend on social security, we must plan and invest wisely to build a strong savings for retirement. Further, I think when I retire, if not at a point before, I would move all my "risky" investments to more secure investments, to protect myself from another possible collapse in the market after I quit working.
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