Inflation – this one word strikes terror in the hearts of many retirees on a fixed income.
Never to fear, we have a cost of living adjustment (COLA) in Social Security to help save us — maybe not the more generous COLA that we have come to expect if the President and Congress decide they should balance a portion of the budget by restructuring the consumer price index (CPI) formula used to calculate increases in social security income.
Can annuities be used to hedge against depleted spending power in retirement? Certainly! Today’s hybrid annuities are bringing forth solutions for just that concern. Annuities developed by multiple insurance companies are now offering options to tie annuity income to inflation tracking indexes such as the CPI-U. This creates an additional option to other strategies used by advisors in the past such as laddering annuities.
Watch as Dick and Eric discuss the potential change in the CPI and what annuity strategies you might consider if inflation is a concern for you in retirement.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Check out this article from Walter Hickey on what the change in the CPI might mean for Social Security.
How Obama’s Plan For Chained CPI Is Both A Stealth Tax On The Middle Class And A Cut In Benefits For Grandma
Last week it was revealed that the President’s budget proposal will include a revision to the way the government calculates the impact of the rate of inflation as a concession to House Republicans.
Still, a switch to chained CPI from the current rate demonstrably cuts benefits to seniors and could be a stealth tax on primarily the middle class.
The Consumer Price Index (CPI) is used as a proxy for the annual cost of living adjustment used to keep federal benefits in line with inflation.
There are several different ways that economists calculate the Consumer Price Index, according to the AARP Public Policy Institute.
- CPI-W is the current cost of living adjustment index for Social Security. It reflects the spending habits of households where the income comes from a wage earner.
- CPI-U expands CPI-W to reflect the spending habits of the retired, professionals, the unemployed and self-employed as well as wage earners.
- A new, experimental CPI-E looks exclusively at how the elderly spend their money.
“Chained CPI” refers to another adjustment, particularly to CPI-U.
As an example, CPI-U and CPI-W already incorporate people switching from Starbucks coffee to homemade when prices increase.
Chained CPI-U takes that a step further — the idea that when coffee gets more expensive, people switch to orange juice. It incorporates more switching.
When it comes down to it, Chained CPI-U spits out a lower rate of inflation than regular CPI-U, which already spits out a lower rate of inflation than the current CPI-W. As a result, were the government to switch the way they index cost of living adjustments to chained CPI-U from CPI-W, payouts to seniors would increase at a much slower rate.
This means that over time, seniors receiving Social Security see their benefits cut. [Read More at BusinessInsider.com]