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This is what your Social Security check will look like next year — and why

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You think the presidential contest is controversial? Try discussing Social Security’s cost-of-living adjustment.

I should know, because a year ago I devoted a column to discussing the pros and cons of various ways of calculating Social Security’s COLA. In response I got more angry emails than to virtually any other column I’m written over the last two decades.

Perhaps foolishly, I am focusing on this topic again. The occasion is last month’s announcement that Social Security’s COLA for next year will be 1.3%.

Read: This is how much your Social Security will increase in 2021

Many reacted with immediate outrage to the announcement. As usual, however, the controversy created more heat than light.

80% of older Americans can’t afford to retire – COVID-19 isn’t helping

Let me start with the complaint articulated by one national organization that advocates for Social Security reform: “Next year, seniors will receive a meager 1.3% Social Security cost-of-living adjustment (COLA), the lowest since 2017…The average Social Security beneficiary will see a paltry $20 month more in benefits in 2021. This COLA is barely enough for one prescription copay or half a bag of groceries.”

This complaint reflects the all-too-common confusion of the nominal and real (between unadjusted and inflation-adjusted amounts). The reason that the COLA for next year is the lowest since 2017 is that inflation also is the lowest it’s been since 2017. On an inflation-adjusted basis, next year’s COLA is no better or worse than in prior years.

Read: Social Security and other safety nets are more important than ever

To illustrate, consider 1980, when the Social Security COLA was 14.5%. Those complaining that next year’s COLA is too low presumably would have been overjoyed then. But their delight would have been an indication of what economists call “inflation illusion,” since inflation at that time also was running in the double digits. On an inflation-adjusted basis, Social Security beneficiaries that year were no better off than they will be in 2021.

CPI-E vs. CPI-W

To be sure, a legitimate argument can be made that the inflation measure the Social Security Administration (SSA) uses to calculate the COLA underestimates the true inflation faced by retirees. But it’s important to put that argument in context.

Currently the SSA bases the COLA on trailing-year changes in what’s formally known as the “Consumer Price Index for All Urban Wage Earners and Clerical Workers” — and informally known as CPI-W. It is similar, but not identical, to the better-known CPI that gets the headlines each month in the financial press — the “Consumer Price Index for All Urban Consumers” (or CPI-U). Historically the CPI-W has risen faster than the CPI-U, but it didn’t over the last 12 months (as you can see from the accompanying chart).

Many urge the SSA to use a different inflation measure known as the Consumer Price Index for the Elderly, or CPI-E. The organization I quoted earlier argues that “the current COLA formula — the CPI-W — is woefully inadequate for calculating the true impact of inflation on seniors’ pocketbooks. It especially underrepresents the rising costs that retirees pay for expenses like health care, prescription drugs, food, and housing. We support the adoption of the CPI-E (Consumer Price Index for the Elderly), which properly weights the goods and services that seniors spend their money on.”

Read: You can still claim spousal Social Security — even if your spouse is gone

Yet next year’s COLA would have been barely different had the SSA relied on the CPI-E instead of the CPI-W: 1.4% instead of 1.3%. That would translate into a $21 monthly increase for the average Social Security beneficiary instead of $20.

Nor is this small difference all that unusual. Over the last 20 years, the CPI-E has risen at an annualized rate that is just 0.14 of an annualized percentage higher than the CPI-W. And there have been six years since 1999 in which the CPI-E rose by less than the CPI-W.

To chain or not to chain

It would take an act of Congress for the SSA to begin using the CPI-E for its COLA calculations instead of the CPI-W, and many in Congress have proposed such a change. But retirees and soon-to-retirees might want to be careful opening up that can of worms. That’s because other changes have also been proposed to how inflation gets adjusted — and, if adopted, some of those other changes would reduce the COLA.

One of those proposals is to use what’s known as a chained version of the CPI rather than an unchained version. The difference has to do with how consumers react to a higher price for something they otherwise would buy. Rather than pay it, they often will substitute something of lesser cost. The unchained CPI does not take this substitution effect into account, while the chained version does.

According to some estimates I’ve seen, moving to the chained version would decrease the COLA by more or less the same amount by which it would be increased by a move to the CPI-E from the CPI-W. So if both proposed COLA-calculation changes are made simultaneously—moving to a chained CPI-E from an unchained CPI-W—the net effect could very well be insignificant.

The COVID-CPI

I should also acknowledge the evidence that, during the current pandemic in particular, the Consumer Price Index is significantly understating inflation. To understand that evidence, recall that the CPI is calculated based on consumer spending habits. Any changes in those habits that have taken place since the pandemic began in March would not yet be reflected in those calculations.

Alberto Cavallo, a Harvard Business School professor, calculates that the CPI would be 0.6 percentage point higher if those changes were reflected.

That is significant. But, again, context is important. Notice from the accompanying chart that this higher inflation estimate would translate into a $29 monthly increase in the average Social Security payment in 2021 — $9 a month more than what is currently slated to take place.

The real issue

The real question in this debate is not how the COLA is calculated but whether Social Security benefits are high enough in the first place. If people felt that they were, then my hunch is that the debate about the COLA would fade away.

Be my guest if you want to engage in a discussion about how high Social Security benefits should be. It’s an important and complex discussion.

Just don’t use a methodological and statistical discussion about inflation adjustment as a proxy for this larger question.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


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Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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