"If we calculated COLAs according to methods in use before 1980, Social Security and other benefits would be twice what they are today. How did Reagan and subsequent administrations manage to ignore the real increases in the cost of living?
First, they substituted rental price inflation for inflation of housing prices. As every realtor knows, whenever house prices go up, rental prices go down. When interest rates fall, more people can afford the monthly payments on a new home. So they go shopping for a new house. The higher demand causes house prices to go up. With people moving out of rentals into new homes there are many vacancies. To fill them back up, landlords lower rents. You see the connection. House prices go lip, rents go down. Rents are therefore a terrible gauge of house prices.
On the other hand, using rental costs as a measure of house prices is a great way to make house inflation disappear. It also takes an enormous bite out of the overall inflation numbers. Housing costs take up almost 30 percent of the CPI. The switch from house prices to rental costs in 1983 cut the CPI from 6.2 percent down to 4.3 percent
In 2008, the average Social Security income was $10,189 when it should have been $21,405.
Was the lower number of $10,189 enough to keep a person out of poverty? Not according to the government’s own poverty guidelines. That year, the poverty threshold for someone sixty-five or older was $10,326. Apologists for cutting Social Security income insist that seniors have many other sources of income. But do they?
What about private pensions? Formerly defined benefit pensions were the norm, but today only 13 percent of those close to retirement have this kind of pension. Those who have pensions at all have 401(k)s, or defined contribution pensions.
Today, both types of private pensions are in bad shape. Defined benefit pensions don't pay much because they are underfunded. And defined contribution plans have lost money. Many were invested in stocks and bonds backed by bad mortgages. When the stock market crashed and the housing market went bust, these plans lost tons of money. As a result, private pensions don't pay very much to retirees. Let's look at 2008. For people sixty-five and older, most (65 percent) got no pension money at all. And for those who had pensions, most didn’t get very much. The average was $4,768 a year.
What about inheritance money? Could this make a difference? Not likely! One study found that only 15 percent of people close to retirement expect to get any inheritance. And it isn't very much. Of the few who get something, only 2 percent wound up with more than $100,000. So most people won't get much, if anything at all, from dead relatives.
There is another possible source of retirement income, the equity a person has built up in a home. In late 2000, the housing market took off The Federal Reserve had lowered the interest rate it charged banks for money. The drop was big, from 6.5 percent down to 3.5 percent. Banks passed the savings People of retirement age (sixty-five and older) already feel the pinch. Most cannot count on any money from the equity in their home. And for those who do have some equity, the income it provides is small. The average is less than $5,000 a year.
What about wages earned after retirement? Does this make a difference? A recent survey found that 72 percent of workers planned to be employed after they retire. But seniors have a hard time finding full-time work. Most who are employed work part time and what they earn amounts to only 2 percent of what they receive from Social Security and a private pension, if they have one. As a result, they cannot count on much help from finding a job.
Even with an honest inflation adjustment that almost doubles Social Security benefits, most seniors would still fall below the poverty threshold. Nor would they break this barrier after padding their Social Security payments with income from a private pension, home equity, and wages. The extra income would boost their total to only $17,665, still short by more than $2,000 of breaking through a poverty threshold of $19,710. This bare bones income is not even what retirees receive today. It is what they would get if the COLA adjustment was accurate instead of rigged.
