Retirees Get Blasted by Inflation!
Henry K. (Bud) Hebeler
In the first ten years of my retirement, my fixed pension lost 30% of its purchasing power according to the Department of Commerce’s measure of the change in the Consumer Price Index, CPI. Yet economists point out that the CPI had only modest growth in those years. Still, a 30% loss is a big one. Those who did a Mom and Pop analysis on a scrap of paper to estimate their retirement needs were likely totally unprepared for the compounding of small amounts of inflation over a period of years.
My own folks agonized over some numbers to make the best projection they could. They didn’t have the tools that we have now to forecast retirement needs and terribly underestimated the effects of inflation. It was especially hard on them because they went through one of those periods of high inflation as well. Over the course of 30 years in their retirement, their purchasing power dropped by almost 80%. Said another way, their fixed income bought only about 20% of the food, housing, transportation, and so forth, late in life compared to what they were able to buy when they first retired. My sister and I offered what financial help we could.
Computer programs now help people do a better job of planning. But the programs are completely at the mercy of the inputs. With regard to inflation, the default value is almost always 3%. Never mind that that 3% “long-term average” includes the years of the Great Depression. If you start after the Great Depression, the long-term average is about 4%. Over 30 years of my parents’ retirement, inflation grew at 5.3%.
Consider what these differences mean to an elderly retiree. Using the default values in most projection programs, $1,000 item now would cost $2,430 after 30 years. At 4% inflation, it would cost $3,240—one-third more than at 3%. But in the period of my parents’ retirement, a $1,000 item now grew to cost $4,700! That’s approaching a five fold increase.
Albert Einstein said that one of the greatest miracles was the compounding of interest. In those days, there was no common measure of inflation—and inflation values were likely very low compared to more recent experiences. Were he alive today, he could well have said that one of the least understood things is the compounding of inflation.
Retirees have to consider that an ever increasing share of their budgets will go to health care as they age. Unfortunately retirees have compounding of compounding when it comes to health care. That’s because their needs for health care assistance compound and the cost of each unit of health care compounds with inflation. It’s like compounding squared.
First consider the increasing needs of the elderly for health care. Before retirement, people may see a doctor only once or twice a year. Elderly retirees may average twelve visits to a doctor each year. Near death, people may see a doctor or medical staff member every day or even every hour. In my own case, in 33 years of working at Boeing, I used only one day of sick leave. Catching the common cold was by biggest problem. After retiring, I went to the hospital numerous times for surgery, and my uninsured costs for dental work, eye care and hearing problems soared.
Next consider the costs of a single health care visit, test or drug. Health care inflation costs can easily be two or three times that of the CPI. That’s because of lots of factors. These start with medical school costs increasing much faster than the CPI so that the cost to educate a doctor or pharmacist or nurse requires that they charge more to recover the college investment.
Then there is the drug industry that continues to stretch for ever more exotic drugs to more effectively combat health problems. Consider too the use of more sophisticated equipment for diagnosis and treatment that increase the costs. Add the costs to comply with government regulations such as you see in your dentist office where everything touched by a human gets replaced for each patient.
Of course there are many other things including increased mal practice insurance costs, a growing overlay of government regulations needing more administrative staff to cope with such things as Medicare and insurance reporting, and so on. There are now probably more paper shufflers in a medical facility than medical staff. You can’t even see the army of government counterparts that write the rules and check on compliance, but you can feel the effects in your taxes.
The compounding of occurrences with age combined with the compounding of health cost inflation rates never enters into the CPI that a retiree should be using for projections. If the government admitted that retirees had higher inflation rates than workers, it would be forced to increase Social Security payments at a faster rate. This would add to an already almost impossible Social Security funding problem.
Those who already get Social Security checks have seen some of the effects. Many people have seen their monthly payments go down year after year, not up as they planned. Why? Because Medicare Part B and Part D costs are deducted from their Social Security checks. These costs have increased faster than the increases of their base amounts, so the net is less each year. Higher income folks have also been hit with a “means test” that increases the Medicare monthly charges depending on their income.
So, next time you see that 3% inflation rate as the default value for your retirement projection, give it some more thought. Holding inflation to 3% for a retiree would take a miracle well beyond that Einstein envisioned.