American Investment Services, Inc.

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Feb. 2011 – Price Inflation, Social Security & Senior Citizens’ Burdens

While the broader media has largely ignored until only recently the flaws inherent in Social Security, our parent organization, AIER, has consistently pointed to these deficiencies. In 1935, when Social Security first became law, AIER warned against the depressive effects of Social Security’s taxes. In 1939, the first of many expansions was enacted, prompting AIER to warn, presciently, that Social Security “will burden the present younger generation, and those to come, far more than is generally understood.”

AIER and AIS remain at the vanguard regarding the matter of Social Security and policy implications for retirees. In recent months we have heard from several of our advisory clients who are in retirement. Many are frustrated regarding actual price increases they face relative to price changes reflected in the Consumer Price Index (CPI). They contend that the cost of living for elderly citizens is higher than that of workers. Of particular concern is whether the CPI-W, which is used to adjust Social Security benefits, is an adequate gauge of living costs for the elderly.

We took this matter to AIER’s staff economists who in turn brought to light the CPI-E, a little known experimental price index. This alternative gauge of price inflation was developed by the Bureau of Labor Statistics in 1987 specifically to measure trends in prices faced by Americans 62 years or older.

AIER published its findings last month. Since 1983 annual price inflation measured by CPI-E was on average 0.27 percent higher than it was under CPI-W. On its face this may appear insignificant, but when compounded the magnitude of this differential becomes apparent. If the CPI-E had been used for Social Security cost of living adjustments, benefits would be roughly 7.7 percent higher today, or roughly $820 more per year for a retiree who received the average benefit in 1983.

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