Posted by Mike Smith :: November 5, 2007 @ 8:04 am

Each year, the Social Security Administration adjusts its benefit amounts to account for inflation. The numbers for 2008 are out, and they were recently reported in USA Today.

The cost of living adjustment will be 2.3% for 2008, which will increase the average benefit check by $24. While the adjustment is smaller than it has been in the past three years, with increases of 2.7%, 4.1%, and 3.3% in 2005-2007, respectively, a small increase isn’t necessarily a bad thing. While it does mean that beneficiaries get a smaller increase in their check amounts, the increase itself is tied to inflation. So a smaller increase means that inflation is moderating. But is the adjustment accurate?

The question is often raised as to whether the cost of living adjustment is indicative of the true rise in the cost of living for beneficiaries. The adjustment is calculated based on the change in consumer prices in the July to September period from one year to the next. This method has two main problems, discussed below.

Consumer Prices versus Costs Incurred By Beneficiaries
Since most beneficiaries of Social Security are senior citizens, the cost of living adjustment should account for rises in their costs from year to year. By using the broader Consumer Price Index versus the rise in cost of seniors’ largest expenses, such as healthcare, the adjustment likely isn’t large enough. As the referenced article suggests, decreases in consumer spending in areas that don’t affect seniors, such as electronics, somewhat offset the rise in costs that do affect them.

Using Only One Quarter May Delay Accounting for Some Expenses
By only looking at increases in the July to September timeframe, cost of living adjustments may lag behind actual increases in costs that occur at other times. While higher oil prices will likely mean that categorized expenses will be higher next July through September, benefits for the coming year won’t be increased as a result, despite beneficiaries seeing higher gasoline and heating costs well before then.

With the broad range of consumers using Lending Club P2P loans for their financial needs, there are likely readers who will be affected by this cost of living adjustment. While the needs of each beneficiary are different, it seems that changes could be made to make more accurate adjustments.

I’d be interested to hear what costs are rising most rapidly for all of our readers, but particularly those on Social Security. Feel free to add a comment about your rising expenses and whether the cost of living adjustment will suffice.