Deflation & Increased Social Security Purchasing Power

Ever since the government announced there would be no Social Security cost of living increase next year I have received several messages from members of our group like "but can you explain this to me? Government will not pay more in social security benefits next year - BUT it seems they have money to pay for a new health care plan. Where is that money coming from?"

For those senior citizens who have similar feelings please realize the healthcare & Social Security issues are not directly related.

Since 1975, Social Security general benefit increases have been cost-of-living allowances or COLAs that are based on the change in the consumer price index (CPI) which is actually negative over the past year mostly due to the large drop in energy prices (gasoline dropped from over $4 per gallon last year to $2.50 per gallon today). By law Social Security benefits cannot be reduced due to deflation like the current index calculation indicates which means that Social Security checks actually have more purchasing power now than they did a year ago.

I have kept monthly inflation figures since January 1967 when I finished college mostly to gage how my income & purchasing power were doing compared to both the government CPI inflation figures & my own personal index of actual changes in my cost of living. My charts bear out the government's current deflationary figures.

For anyone who wants to have some fun with inflation comparisons please click on
this website. Go to the top right hand side & you can compare the cost of living for any two periods from 1913 to 2009. A reduction of 1% in the cost of living is shown if you plug in 2008 to 2009.

Inflation is regarded as robbing people who live on a fixed income of purchasing power so that these people really live on a declining income not a fixed income. In truth purchasing power of the Social Security portion of seniors' incomes will increase this year based on the CPI - your own personal index may say something else. The real problem is for those seniors who rely on CD interest income where interest rates have fallen to record lows - CD renewals this year really do reduce seniors' purchasing power because the CD interest rate reductions are greater than the CPI deflation figures.

Interest rates are largely determined by inflation (both perceived & anticipated). These low CD rates are another indication that verifies there is no general inflation recognized by the bond market - otherwise the rates would be higher.

So for any senior who prefers having an inflation increase in their Social Security check to having a real purchasing power increase thanks to deflation & the rules that say their checks cannot be lowered no matter how much deflation we have I can only ask them if they would have preferred having their home mortgage interest payments doubled when they were buying their house so that they would have had a bigger income tax write off.