Archives for October 22, 2018

This has been a pivotal month for the more than 62 million people receiving a Social Security benefit check. Less than two weeks ago, the Bureau of Labor Statistics (BLS) released September’s inflation data, giving the Social Security Administration the final data point needed to calculate the 2019 cost-of-living adjustment, or COLA. Think of COLA as the “raise” that beneficiaries receive each year to account for the inflation that they’ve faced.

Next year, thanks to healthy energy and shelter inflation, Social Security recipients can expect their benefits to increase by 2.8%, which is the largest COLA passed along since 2012.

Social Security’s COLA is letting seniors down

But, truth be told, Social Security’s annual COLA is failing the group of people it was most designed to protect: senior citizens.

According to an analysis from The Senior Citizens League (TSCL), the purchasing power of Social Security dollars has declined by 34% for seniors since the year 2000. Put in another context, what $100 in Social Security income used to buy in 2000 now buys $66 worth of those same goods and services. That’s not how COLA is supposed to work.

The reason seniors have been shortchanged by the program has to do with two inherent flaws with Social Security’s inflationary tether.

1. The CPI-W is focused on the wrong group of people

The program’s inflationary measure that determines COLA is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It’s designed to measure price fluctuations for eight major spending categories and a laundry list of subcategories, resulting in the raise that beneficiaries receive in the upcoming year.

The problem with the CPI-W is that it’s focused on the wrong group of people. Despite retired workers comprising about 70% of all recipients, the CPI-W measures the spending habits of urban and clerical workers, who, as you might guess, are typically of working age and not receiving a Social Security check. Because urban and clerical workers spend their money differently than senior citizens, it leads to important categories for seniors receiving less weighting and less important expenditures receiving added weight.

For instance, even though the comparison is a bit dated (December 2011), a side-by-side look by the BLS at the CPI-W and Consumer Price Index for the Elderly (CPI-E), an inflation measure that specifically focuses on the expenditures of households with persons aged 62 and over, found that seniors spend twice as much on medical care, as a percentage of total expenditures, relative to the aggregate weighting for medical care in the CPI-W. As a whole, medical care and housing expenses are underrepresented for seniors, whereas less important costs like education, apparel, and transportation, are giving more priority by the CPI-W.

In short, it sets seniors up for failure by passing along an inadequate COLA.

2. Only a small piece of the pie is considered for inflation purposes

The other piece of the puzzle is that the COLA calculation isn’t taking into account the full picture.

Social Security’s COLA only takes into account previous year and current year CPI-W readings from the third quarter (July through September). The average reading from the third quarter of the previous year serves as the baseline, while the average reading from the third quarter of the current year is the comparison. If the average CPI-W reading rises from the previous year, then beneficiaries receive a raise that’s commensurate with the percentage increase, rounded to the nearest 0.1%. If prices fall, which has only happened three times since 1975 (2010, 2011, and 2016), then benefits remain static.

In other words, COLA completely disregards year-over-year inflation changes the other nine months out of the year. This is notable because the three months that are taken into consideration involve peak hurricane season, which can disrupt oil and gas production and refining, thereby leading to higher energy costs and a beefier COLA some years. This is what happened when Hurricanes Harvey and Irma impacted the U.S. last year.

However, hurricanes are unpredictable, meaning lawmakers have seemingly banked on energy prices providing the bulk of the inflation to push COLA higher each year. It won’t always work that way, and it makes the COLA calculation that much more inaccurate for seniors.

Congress can’t agree on much

To add some icing on the cake, despite being well aware of the flaws with Social Security’s COLA, lawmakers on Capitol Hill are in no position to fix it. That’s because neither party can agree on a COLA replacement.

Democrats would prefer to implement the aforementioned CPI-E, which would presumably do a better job of accounting for medical care and housing expenses and thereby pass along a more accurate annual COLA. According to TSCL, it would also result in a higher average annual COLA.

Republicans much prefer the Chained CPI, which takes into account substitution bias. If you’ve ever traded down to a similar good or service because it was cheaper, this is a perfect example of substitution bias. Though it describes a real-world consumer behavior, it would result in lower annual COLAs than seniors are already receiving.

With absolutely no incentive for either party to work with their opposition, the CPI-W and its two major flaws are likely to remain the program’s inflationary tether for a while longer.

If asking for a raise were a less daunting prospect, perhaps more people would do it. But it takes guts to talk money with your boss, which explains why 56% of employees have never done so.

Still, when it comes to braving the salary boost discussion, men seem to have an advantage over women. In fact, 64% of men claim they’re comfortable negotiating raises, according to a new report by Student Loan Hero. When it comes to women, however, only 50% feel confident going into those talks.

These attitudes toward talking money could help explain why a wage gap continues to persist among male and female employees. Women are said to earn anywhere from $0.72 to $0.82 for each dollar their male counterparts bring in, all other things (such as job title and qualifications) being equal.

If you’ve historically shied away from asking for more money at work, it’s time to step up and speak up for yourself. Otherwise, there’s a good chance you’ll lose out on income that could’ve otherwise been yours.

Go in knowing your worth

A big reason so many people fear the raise talk is that they feel they’ll be laughed out of the room. But if you come in equipped with salary data that proves that you’re underpaid, your boss will have a harder time denying or dismissing your request. So do some research to find out what you’re really worth, and then use that information to build your case.

Highlight your accomplishments

Your boss may not be willing to give you a raise just for the heck of it, so before you go into that conversation, make a list of the ways you add value to your company. Maybe you’re that person who consistently resolves technical issues when systems break. Maybe you’re extremely adept at writing contracts, thereby saving your company money. No matter what it is you do that makes you an essential employee, don’t be afraid to talk it up in your boss’s presence. And if you can back up your claims with hard numbers (say, that your actions alone saved your company $200,000 this past year), even better.

Be prepared to leave

If you go into that raise conversation with a solid argument and strong data, there’s a good chance you’ll come out successful. At the same time, recognize that that may not end up happening, in which case it certainly pays to get comfortable with pursuing outside opportunities. Now, this isn’t to suggest that you should quit on the spot if that discussion doesn’t end up going well. But if you open yourself up to the possibility of moving on should your boss refuse to budge on salary, you’ll be less nervous going into that conversation.

The more comfortable you are negotiating a raise, the greater your chances of boosting your income and walking away with a fair wage. So don’t shy away from that conversation — because if you do, and your earnings remain stagnant, you’ll really have no one but yourself to blame.

It started with a student loan for college. Then you bought a car and a home. Then you had some unexpected expenses that you charged to your credit card. Now you’re staring down a mountain of debt and not sure which one you should tackle first.

It would be nice if there were a simple formula that could answer that question, but it isn’t quite that easy. It all depends on your financial goals, your attitude, and the types of debt that you have. Here’s a quick look at three popular strategies for paying off debts and how to choose the one that’s right for you.

Many working Americans understand the importance of building a nest egg to pay the numerous bills they’ll face in retirement. And make no mistake about it: Postcareer seniors often wind up spending as much as they did during their working years, and it’s because many of life’s expenses inevitably end up staying the same.

But if there’s one expense that’s likely to increase in retirement, it’s healthcare — especially when we lob long-term care into that same bucket. The frightening thing, however, is that most Americans aren’t putting a lot of thought into long-term care ahead of time; only one-third of workers of all ages say saving for it is a priority, according to the Society of Actuaries. But seeing as how the bulk of seniors do end up needing some type of long-term care in their lifetime, that’s a dangerous mistake to be making.

Will long-term care ruin you financially?

The costs associated with long-term care are borderline shocking. The average assisted-living facility in the U.S. costs $3,750 per month, or $45,000 per year, according to Genworth Financial’s 2017 Cost of Care Survey. But that’s practically a bargain compared to nursing home care, which costs an average of $235 per day, or $85,775 per year, for a shared room. A private one, meanwhile, will cost the typical senior $267 per day, or $97,455 per year.

Even in-home care can be prohibitively expensive. The average cost of a nonmedical home aide is $21 per hour. The typical senior who needs someone to assist with basic living functions at home for three hours a day is therefore looking at about $23,000 a year.

Of course, these are just averages, which means that depending on need and geographic location, these figures certainly have the potential to go up. That’s why it’s crucial for workers to prioritize long-term care and devise a plan to cope with that expense down the line.

Defraying the cost of long-term care

Scared yet? If you’re not saving for or thinking about long-term care, you should be. That said, there’s a simple way to ease your mind, and it’s called buying long-term care insurance. The amount of coverage you get will depend on the plan you end up with, and generally speaking, the higher your premium costs, the less you’ll end up paying out of pocket should you wind up needing that care when you’re older. You can keep your premium costs down, however, by applying at a reasonably young age.

For the most part, your fifties are the ideal time to get long-term care insurance because you’re more likely to snag a health-based discount on your premiums. If you’ve already missed that boat, your best bet is to apply as soon as possible.

Of course, long-term care insurance is an expensive solution, and while it’s often a good idea, it’s not right for everyone. Also, not everyone who applies gets approved. If you’re not keen on getting a policy, make sure to boost your savings significantly so that you have the potential to cover those colossal costs down the line. Currently, workers under 50 can set aside up to $18,500 a year in a 401(k) plan and $5,500 a year in an IRA. For workers 50 and older, these limits rise to $24,500 and $6,500, respectively. And the closer you get to hitting them, the more protection you’ll buy yourself down the line.

Though you might assume you’ll never need long-term care, the reality is that 70% of seniors 65 and over do, in fact, wind up requiring it. Rather than plan on being in the minority, take steps to ensure that you’re equipped to cover whatever bills ultimately come your way.