Caught in the Cost of Living Trap

October 21st, 2009

No increase coming, now what?

It’s official: for the first time in over a third of a century, Social Security recipients won’t get a cost-of-living increase next year. Instead there’s a chance that these folk will get a one-time check for $250. Which would make you happier?

I prefer the increase

I know what I would do with the check – I’d blow it on the day it arrives. I can’t remember the last time I had a pile of money that size. It would send me running for my wish list. The funny thing about that list is that it never gets shorter, it just grows. I have never crossed anything off it. If I get the cost of living allowance every month it will go a lot further than the one-shot payment. It would mean that I have a little extra each month. And if and when the increase question comes around again, it will be on top of the increased amount, not on top of a non-increased amount.

Unlinked economy

It’s all about linkage. Some countries have linked economies, but here in the US, our economy is not linked. If you buy a life insurance policy for $200,000 then when you pass on, say 40 years later, your heirs still get paid out $200,000, despite the fact that a loaf of bread cost $1 when you bought the policy and costs $5 when you die. The good news is that if your monthly premium for that insurance was $20 per month when you bought it, it will still be $20 when you make the last payment before you leave.

Linked economy

In the same situation in a linked economy, the $200,000 life insurance policy that you buy is linked to the cost of living (or some other) index and when you die, your heirs will receive probably well over a million dollars – the updated value of the $200,000. But in this case there is bad news: your premiums will have been linked too, so that every time there is an increase in the Cost of Living Index, your premium goes up by the same percentage as the index and you may have been paying hundreds of dollars a month in premiums. But here’s the thing: in a linked economy there could never be a decision not to pay the Cost of Living Increase as Congress decided. It’s automatic.

The linked society

In a linked economy the Cost of Living Index is announced and the citizens of that country sit with their ears towards the radio or TV on the monthly date of the increase/decrease announcement. It is important to everyone. Every citizen has something in his or her life that is linked and therefore is affected by the increase or decrease.

Which is the better system?

I have lived large chunks of my life in both economies and I’m still not sure. I do feel that I am better looked after financially in the linked economy.

This entry was posted on Wednesday, October 21st, 2009 at 7:14 am and is filed under Economy, Employment. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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