Another Unintended Consequence

Back in the 1970s, Uncle Sam learned to love inflation. Holders of Treasury bonds and other creditors could be paid off on the cheap, with depreciated dollars. Remarkably, Congress decided to stop stiffing retirees in the same fashion. Social Security benefits were indexed to inflation. As a result, those who retired 10 or 15 years ago receive roughly the same real benefit – with the same spending power – now as they did then.

Guess what? Most retirees don't care a fig about such notions as "real benefits" and "maintaining purchasing power." They believe their benefits increase every year. And they like it that way.

Result, an unexpected new political crisis. No inflation (as measured by the Consumer Price Index) means no dollar increase for 2010. Or, as The Washington Post puts it, Stagnant Consumer Prices Prevent Social Security Benefit Increases.

Uncle Sam is expected to apologize for those stagnant consumer prices by sending each retiree $250.

(Many retirees, including this one, feel the actual cost of retirement living has kept climbing over the last 12 months, but that's an argument for another day.)

Lesson for wealth managers: You may need to explain the declining purchasing power of the dollar and its consequences to more clients and prospects than you realize.