There’s a simmering question in retirement circles today: Should the inflation index that determines the Social Security cost-of-living adjustment be changed to tilt more toward what seniors spend in retirement, such as on medical care.
Probably not, says one of the most expert voices in the retirement business today, Alicia H. Munnell, director of Boston College’s Center for Retirement Research, in addition to being the Peter F. Drucker professor of management services at the school’s Carroll School of Management and a prolific author of books and articles.
Before joining Boston College in 1997, she was a member of the President’s Council of Economic Advisors for two years, and assistant secretary of the Treasury for economic policy from 1993 to 1995. Earlier, she spent 20 years at the Federal Reserve Bank of Boston and earned a Ph.D. from Harvard University.
As part of our VIP interview series, we asked Munnell five questions on current events and how they could affect investment portfolios and retirees going forward. Here are her emailed responses:
ThinkAdvisor: Inflation has jumped 7.9% over the last 12 months. Have you done any research that could help advisors prepare clients for either pre- or post-retirement portfolios with this threat?
The U.S. has not seen any serious inflation since the 1980s. This bout is likely to pass in a year or so, hopefully without pushing the economy into a serious recession.
The advice that I get from experts is decide on your asset allocation for the long run, and then pretty much stick to it.
2. The Social Security COLA, which was raised to 5.9% this year, is now lagging current inflation rates. What’s the best way for advisors to help retirees to counteract the crunch they are taking to their Social Security benefits (especially if they already are collecting benefits)?
Yes, the Social Security COLA lags a little because it is based on the third quarter of 2021 over the third quarter of 2020. But 5.9% compensates for a significant portion of current inflation.
As inflation recedes, the lag in the calculation means that beneficiaries will get more than the rate of inflation on the backside.
3. Do you have an opinion on whether the COLA index should be changed from CPI-W to CPI-Elderly?
The underlying argument for a CPI-E is that older households spend more on medical care than their younger counterparts and the cost of medical care rises faster than other budget items.