Wednesday, October 21, 2015

In Government We Should Trust? ... Lessons to be Learned from Ongoing Government Caused Cost Inflation for Health Care and Education Compared to Private Sector Free Market Competition

Medical costs are continuing their inflationary increases of the past several decades.

Medicare, ObamaCare, Medicaid and other 'benefits' provided by government in essence have no real incentive to control costs. It's a cost plus world of pricing, just like education.

On the other hand, the private sector is governed by supply and demand competition where consumers are in charge. It's the difference between a government monopoly and market competition, pure and simple.

And that's why the cost of health care, including Medicare costs and premiums, will always show sizeable increases, even when energy, food and shelter prices aren't growing and perhaps are contracting. See How the Latest Inflation Data Plays Into the Fed's Thinking.

With that in mind, retirees shouldn't look for any increase in Social Security benefits in either 2016 or 2017. However, they should anticipate that Medicare and health costs will continue on their upward escalator.

Why Social Security Checks Likely Won't See a Big Increase in 2017, Either has this news for the long term planners among us:

"Falling consumer prices over the past year means Social Security payments for seniors and other recipients could be little changed in 2017 as well, even if prices for everything from food to gasoline to drugs increase at a modest clip.

The Social Security Administration said . . . recipients will see no cost-of-living increase in January.
Any increase in 2017 will be based on how 2016 prices compare to the level in the summer of 2014, not 2015. The government doesn’t lower benefit payments when prices fall. But it does take into account decreased costs in determining future increases by setting the scale based highest price level from the third quarter of any year.

In other words, price increases in the next year will have to overcome the past year’s decline before benefit checks will see a bump.

To determine the annual cost-of-living adjustment, the Social Security Administration assesses how an inflation measure called the Consumer Price Index-Urban Wage Earners and Clerical Workers, or CPI-W, changes from a year earlier. CPI-W is a slightly different calculation than the more widely reported Consumer Price Index-All Urban Consumers, or CPI-U.

Social Security looks at the average price level in the third quarter to calculate the change. Average CPI-W fell 0.4% this year from the third quarter of 2014.

So if overall inflation advances 1.7% during the next 12 months–the annual average since the recession ended–the January 2017 cost-of-living increase would be about 1.3%. If prices increase 0.4% or less, there could be no increase in 2017.

A similar scenario played out in 2011. Prices rose 1.5% in the third quarter of 2010 from a year earlier, but there was no adjustment because prices fell 2.1% in 2009 from 2008, during the depths of the recession. Because the 2009 decline was so deep, it held back the living-cost adjustment in 2012.

The results show how deflation can be self-reinforcing on two levels. Since other kinds of payments, including some union wages and housing benefits, are tied to inflation measures, a big decline one year can hold back increases for the next several.

What’s more, without bigger benefit payments, millions of Social Security recipients might be reluctant to increase spending. That would weaken demand, give businesses less leeway to increase prices, and therefore mute inflation pressures."

Summing Up

Health care costs, education costs and other government controlled monopolies aren't subject to market competition.

If energy prices remain low and the U.S. dollar stays strong, then prices paid for energy related and imported consumer goods will remain well under control.

And in the slow-go U.S. economy, consumer spending won't increase by much next year, thus further restraining private sector prices.

Meanwhile, the 'as usual' increasing cost of government will see no let-up as it continues its wasteful and monopolistic ways in areas such as health care and education spending.

Thus, oldsters should plan on a zero or only nominal increase in Social Security benefits for both 2016 or 2017.

That's my take.

Thanks. Bob.

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