Last updated: November 04. 2013 9:33AM - 2457 Views

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Would you rather have your income go up by $68 or $17 a month?


“Is this a trick question, professor Dent?”


Good point. Let me rephrase that. If you are a Social Security recipient — or anyone else whose income increases are tied to inflation — would you rather have your income go up by $68 or $17 a month?


You may be surprised to know that if you are a Social Security recipient, you should be thrilled if your income is only going up $17 rather than $68. As of this writing, the Social Security Administration has not released the official increase for next year, but it appears it will be about 1.5 percent, or $17 a month for the average recipient. This will be the sixth lowest increase since 1975. Be prepared for many mainstream news stories about how the payment is only going up $17 and interviews with several recipients bemoaning this meager increase. In fact, though, this is fabulous news for Social Security recipients. Social Security payments only go up when the country has experienced inflation. Inflation is “a general increase in prices and fall in the purchasing value of money.” If our country experiences inflation of 1.5 percent, a candy bar that cost $1 at the beginning of the year will cost $1.015 for the same candy bar at the end of the year. Inflation is generally bad for our country.


Inflation is especially bad for elderly people. Married senior citizens, who have an average net worth of $128,000 (not counting the equity in their home), are advised by financial professionals to keep most of their investment in “safe” CDs that are government insured. However, bank accounts, CDs and money market instruments typically suffer the worst when inflation occurs. “Real” assets such as stocks and real estate tend to keep better pace with inflation. Moreover, inflation is bad for lenders but great for borrowers. Borrowers get to repay their loans with dollars that are worth less. Senior citizens are far more likely to be lenders than borrowers. They may, for example, have paid off their mortgage, sold their family house, and downsized to a smaller home. When selling the big house, they may have created a partial or full mortgage for the buyer.


Let’s use an example to illustrate the problem of inflation for a retiree. Using round numbers, if a retiree has a CD with $100,000 at the beginning of the year, and it earns 2 percent and there is 1.5 percent inflation, she will have gained $500 of purchasing power from the investment and gained $204 ($17/month for 12 months) in income for a total gain of $704. If that same retiree bought the same CD, but there was 4.5 percent inflation, she would have lost $2,500 of purchasing power from the investment and gained $612 (her Social Security cost of living increase would be 4.5 percent, $51/month for 12 months) for a total loss of $1,888. So, even though the retiree would have received a larger Social Security check, she would have had less overall purchasing power. Of course, we can’t eat or wear money, so what is important to us is not how much money we have, but what that amount of money can purchase.


So, when you see, read or hear the mainstream news reports that imply this small increase in Social Security payment is bad news, give them a little chuckle, because you know better.


Eric B. Dent, a Lumberton resident, is a business professor at Fayetteville State University.

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