By Douglas Goldstein, CFP®

Have your grandparents ever reminisced about the good old days, when it cost a penny for a treat? Over time, prices of goods increase, but historically this has been paralleled by an increase in salary. Traditionally, a salaried worker’s periodic raises help maintain purchasing power. However, the problem arises when one lives on a fixed pension. If a pension doesn’t increase as the cost of living increases, then over the long term, the purchasing power of the pension decreases. This means that even though a retiree receives a check for the same amount, and buys the same groceries, his refrigerator won’t be as full.

For seniors dependent on social security, it’s important to note that at the end of September the American government announced that social security recipients won’t receive a cost of living increase in their monthly checks for the next two years. This is a radical change in policy, given that the American government has been adjusting monthly checks since the high-inflation 1970s. The adjustments will end because the government projections for the CPI (consumer price index – upon which adjustments are made) show that it is expected to decline over the next two years.

The CPI is a broad index designed to measure the cost of living. However, the products and services used in the calculation may not reflect an individual’s lifestyle. While the CPI may be down, the price of health care (a service most seniors need) continues to rise.
This is bad news for those who rely on American social security payments to help pay their bills. These people will have to figure out how to live on less.

This change in policy should serve as a wake up call for the rest of us: Make sure your pension payments are linked to inflation and/or have a cost of living increase built into them. And second, even if you have a “guaranteed” periodic adjustment, don’t trust it! Make sure you have a diversified set of pension and retirement income sources.

The U.S. government is not (yet) defaulting on social security, but it is taking something as American as apple pie and changing the recipe. Nothing is guaranteed.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.