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OPINION

JUST PLAIN TALK: Social Security COLA for 2021

Buz Livingston
Buz Livingston

Beginning next January, Social Security recipients will see a modest, 1.3% increase. Under current law, payments adjust annually depending on core inflation measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Critics point out the CPI-W gives greater weight to prices on items like gas and electronics instead of housing and medical expenses more likely to affect seniors.

For example, Medicare Part B premiums increase more than inflation adjustments. Since Part B is often deducted from payments, beneficiaries end up with less money. In a move showing Washington politicians can do something, the short-term spending bill passed last month restricts 2021 Part B premium increases, but it's a temporary fix.

Something will have to give. Among elderly seniors, half of married couples and 70% of unmarried individuals receive half of their income from Social Security. Over 20% of married couples and over 40% of unmarried couples get 90% from Social Security. Three times in the last decade, beneficiaries received no COLA but faced higher Part B premiums.

Ginger Szala, the executive managing editor of Investment Advisor magazine, recently wrote Democratic candidate Joe Biden proposes using a different formula, Consumer Price Index for the Elderly (CPI-E). To better account for medical expenses, the CPI-E raises the medical component from 5.5% in the CPI-W to 11% in the CPI-E.

While the recently passed legislation and the proposed change in COLAs are steps in the right direction, more has to be done. Social Security is a marvelously successful program that reduced poverty for seniors. Florida recovered from the 2008-2009 recession more robustly because of our high elderly population receiving Social Security.

Another problem for retirees

While low-interest rates spur demand for homes, the flip side is low yields on bonds. Currently, US Treasury notes that mature in 10 years or less yield less than 1%. The historical yield for 10-year Treasuries is 4.5%, but David Blanchett, Morningstar's head of retirement research, cautions retirees should expect returns south of 2%. With core inflation hovering around 1.3%, bond investors will struggle to break even.

Corporate bonds have higher yields, but a benefit of owning US Treasuries or federally insured Certificates of Deposit is safety; your principal is guaranteed. For example, last spring, when stocks lost over 30%, Vanguard's Intermediate Corporate Bond fund lost 11%, but Vanguard's Intermediate-Term Treasury Fund gained over 4%.

One strategy recommended by Dr. Wade Pfau, director of retirement research at McLean Asset Management and founder of the Retirement Researcher website for consumers, is a plain-vanilla single premium immediate annuity (SPIA). With Social Security and a SPIA covering your basic needs, you can keep your stocks and be insulated from market declines. SPIAs account for less than 5% of total annuity sales. Be careful. Most annuities sold help the insurance agent's retirement more than yours.

You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by, masked, 2050 West County Highway 30A, M1 Suite 230.