Social Security Inflation Rate unrealistic

Currently ESPlanner grows social security benefits for those already collecting by the inflation rate entered in Assumptions. The actual increase of benefits has been less than inflation - even the default 3% - by a sizable percentage for years. Will the program be revised to allow the SS benefit inflation rate to be set by the user?
If this is not feasible, what can a user do to make ESPlanner's future SS benefits more realistic.
Thanks
James

Comments

Hi James,

On the old site, there was a thread on this topic around the beginning of this year. Basically, they set the SS COLA to the value used by SS and put out a software update within a day or so after it was announced to take care of this issue.

I'm expecting the same to occur in early 2015.

Best,
Brian

Hi Brian, That's the correct way to deal with this. Is the current COLA then used as the inflation value to project future benefits? The reports I run show my social security benefits unchanged regardless of the inflation rate I use in assumptions. It appears that changes to ESPlanner have decoupled SS benefits from the assumpution inflation rate. Is that correct? I'm just trying to understand the results.
Thanks
James

Hi James,

Mike can answer this authoritatively, but my understanding is that there are two parts here. First, the current COLA is input as described above and updated each year to align with CPI. Second, the SS results for future years are assumed to be constant in real dollars, for those already collecting SS. Whatever inflation assumption you manually set is used to achieve this. That's why the SS results don't change when you change the inflation rate.

Best,
Brian

dan royer's picture

That's how I view it too Brian. If you assume inflation is 2% then you'll get a 2% inflation adjustment in your SS benefit each year which will in turn show your reports steady in terms of today's dollars all the way down the column. How that index is set, the COLA, would be changed in the program if in fact it's changed by the government.

Dan, Brian,
Sorry, I wasn't clear when I said my benefits did not change when I changed inflation rates. Regardless of what inflation rate I assume, the dollar amount of my benefit does not change and it remains the same for all future years. The latter I would expect from what you've said. But, I would expect the benefit dollar amount to be different beginning next year for different inflation assumptions. Am I missing something here?
Thanks
James

Hi James,

I think the way to consider your "next year" results is as a special case. Basically the value shown is constant in real dollars as a placeholder to being updated with the actual SS COLA specific inflation (CPI-U) in the Jan/Feb update. Once you see that update (in 2015), you will see a higher SS amount in 2015 dollars.

As an aside, CPI-U (urban consumers and used for SS COLA) inflation figures tends to undershoot a number of other measures for inflation including CPU-W (workers), CPI-E (age 62+), and various alternative (non-government) estimations. Starting in January 2015, the Bureau of Labor Statistics is introducing a new estimation system for CPI so there will be additional TBD changes.

Anyway...hope this is helpful.

Best,
Brian

Brian,
Thanks for the clarification . I get it now.
James

Is there a way to add an estimated COLA for future years. Even if I set inflation rate at zero the SS remains the same and never changes. It would be nice to add an COLA rate for future years.

Thanks,
Joe

There is a built in COLA which matches your inflation rate (assumptions tab) to ensure your future benefits are constant in real dollars (everything else being ignored). Each year in the Jan/Feb update, the actual CPI-U COLA for SS is applied as the new baseline for the year.

Of course, the value of SS benefits increases in nominal dollars, but real dollars are shown in the reports.

Best,
Brian

Wouldn't it be more prudent for future years to adjust Social Security benefits by the difference between the CPI-U COLA and the assumptions tab inflation rate?
So in recent years where the CPI-U has been lower than the inflation rate your benefit would be reduced. It seems that the SS benefits would be over-stated in future years depending on your inflation rate assumption. Maybe I'm just not understanding this correctly?

Thanks,

Mark

It's actually the third quarter CPI-W that is used by SSA to determine COLAs, not the annual CPI-U.
ESPlanner uses your inflation rate for future COLAs and then expresses the results in 2015 real dollars. So, since COLAs equal your inflation it washes in terms of real 2015 dollars.

If the actual 2015 COLA, which we will update and apply in early Jan 2016, is less than your inflation rate, then your 2016 Social Security benefits in 2016 dollars will be lower than they would have been if had the 2015 COLA been equal to your inflation rate.

We've considered allowing the user to enter a future COLA percent that is independent of their inflation rate. What do you think?

Hi Mike,

I have mixed feelings on this (future COLA rate). Ultimately, I'd leave it as is although I could be convinced with a good argument the other way.

Best,
Brian

Brian,
I don't think that you'd lose any fexibility if we implemented a serarate COLA. You could always set the COLA equal to your inflation rate.

Mike

Hi Mike,

Still not really sure I understand that, but it sounds to me like any SS benefits after the current year have the assumptions tab's inflation rate applied, which to me is currently overstated. Am I wrong on this? This in turn would exaggerate the amount of money you have coming in over time and might give a false sense of security. Obviously at anytime the SS COLA could equal the inflation rate but I would rather err on the side of caution.

I really like the idea of a separate SS inflation rate being set by the user.

Thanks,

Mark

Mark,
While recent COLAs, say the last 5 years, have averaged 1.7%, the average COLA over the 40 years that automatic COLAs have been in effect has been 4.0%!
So, you really need to gueastimate a 30 or 35 year forward looking COLA, not just match the last few years.

Hi Mike,

It's definitely a balancing act but I would still prefer having control and under-estimate the COLA vs. over-estimate. Like you mentioned, you could always set it equal to the inflation rate and get the same results as currently. Thanks for at least considering changing to a separate input.

Mark

The discussions I've had with Larry are: 1) should we impose some consistencty in future estimates of inflation, while fully realizing there can be short term differences between the CPI-U and the CPI-W, by having only one inflation rate, or 2), should we have a separate SS COLA and run the risk of users inadvertantly making very bad estimates of COLAs based on too short of a perspective.

Perhaps I'm not considering all of the angles, but here's my current view:

- Having 1 inflation rate is simpler for all users (although perhaps not as valuable for power users).
- Guesstimating ESPlanner variables is rife with potential to make significant mistakes. I've tried to diligently research each variable, historical track records where available, and my own estimates, then used a "reasonable and conservative" filter, then implemented a "safety factor" approach to deal with this. With all that, it's anybody's guess if their inputs are better/worse than mine.
- It's close to 100% certain that over multiple decades we will have varying inflation "eras". Over 10 years, perhaps you could nail this down (although debates over hyperinflation vs. deflation in the last few years are widely varying), but over 40+ years your odds of nailing this with any degree of accuracy is low.
- While everyone's personal inflation rate is different from CPI-W (thanks Mike), we already have to guesstimate this with our best shot or perhaps bracket it with higher and lower estimates to get a "range of reasonable estimates".

If you give me another lever, I'll definitely use it, but I'm not certain if any potential for more accuracy will turn out in real life and will be offset with complexity and potential for error.

It seems like this feature would be most valuable for people furthest from starting SS. Do I have this right? For those near to starting SS or already receiving benefits, it seems like there wouldn't be as much variance.

Best,
Brian

I'd lean toward a separate SS COLA rate but not require the user to change it constantly, even if they change the regular inflation rate. Rather, include a check box somewhere, default=Y, to the effect that SS COLA = inflation. If left checked and the user adjusts inflation, then SS COLA inherits that inflation change. If unchecked by the user, they are responsible for whatever changes they make. Further, locate those fields on the same tab so the user doesn't forget about one when changing the other.

Chris

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