Since it’s playoff season, it’s apt to use a baseball metaphor for what is happening to today’s retirees. For people not familiar with the expression, a “squeeze play” refers to when a runner on third base starts for home plate as the ball is being pitched and the batter attempts to bunt to give the runner a chance to score.
Last week, it was announced that the approximately 69 million recipients—retirees, disabled people, and others – who rely on Social Security will receive a 1.3% cost-of-living adjustment to their monthly checks in 2021. The 1.3% COLA is slightly less than the 1.6% COLA in 2020 and significantly less than the 2.8% COLA in 2019. The size of the COLA is a function of the rate of inflation, which has been relatively benign for the last decade.
So why do retirees find themselves in a “squeeze play”? Well, the overall inflation rate is only around 2%, but inflation in two key categories for retirees is much higher, and the COLA doesn’t account for that. Healthcare and housing constitute almost half (48%) of spending by retirees ages 75 and over. And medical costs have been running more than twice the rate of inflation. Long-term, medical CPI is forecasted to increase on average by 4.8% annually.
The 2021 COLA translates to an average monthly increase of only $20, to $1,543 from $1,523. That won’t get the job done for many retirees that have to meet their monthly living expenses. Retirees are also being squeezed by the Federal Reserve’s low-interest-rate policy (see Dave’s letter to the WSJ), which results in historically low rates of return on CDs and other savings instruments that aren’t keeping up with inflation, either.
So what can be done? One avenue that healthy retirees and near-retirees should explore are lifetime annuities. These can provide income at a meaningfully higher rate than inflation thanks to a feature known as “mortality credits”.
This prolonged ultra-low interest rate environment means there are some 50 million Americans age 65 and up that will be challenged to maintain their current standard of living. That lack of spending ability will have dampening effects on our economy for years to come, further weighing down interest rates.
Perhaps the better baseball metaphor to describe the plight of retirees is being caught in a “run-down” – caught running between the bases and being tagged out.