But the higher elderly inflation rate also has implications for portfolio management and pocketbook management for retirees. Retirees are especially vulnerable because they don't have the capacity to counter inflation by seeking higher wages, and returns on low-risk fixed-income investments aren't getting the job done in a time of near-zero interest rates. (Rates may start to tick upward now that the Federal Reserve has signaled the end of of its zero-rate policies).
The Right Yardstick?
From 1985 to 2014, the CPI-W ran 6.5 percent behind the CPI-E, according to research by J.P. Morgan Asset Management. A slowdown in healthcare cost inflation has, however, led the two indexes to converge a bit during recent years. But if medical inflation does take off, the argument for using the CPI-E is likely to heat up again.
And health inflation does appear to be returning to its historical norm - about 7 percent annually. Renewed health inflation fueled the controversy over the flat 2016 Social Security COLA because some Medicare beneficiaries - those not "held harmless" - could have faced a huge 52 percent hike in Part B premiums. (That didn't happen: If you're not on Social Security but enrolled in Medicare, you're paying $118.80 per month this year, plus a monthly $3.00 surcharge, for a total of $121.80. The Part B deductible will be $166.00 for all beneficiaries, up from $147.00.)
And Medicare's trustees forecast that the Part B premium will reach $140.00 in 2020, and $174.00 in 2024.
Inflation's impact on seniors isn't limited to healthcare. Social Security beneficiaries have lost 22 percent of their buying power since 2000, according to a study by the Senior Citizens League (TSCL). The study examined prices of key consumer goods and services typically bought by seniors from 2000 to January 2015. Of 34 items measured, 22 exceeded the amount of increase in the COLA over the same period (see chart showing selected items from the study). The TSCL survey found that the COLA has increased benefits 43 percent since 2000, while typical senior expenses have jumped 74 percent.
Planning for Inflation
What can you do to hedge against the negative effects of future inflation in retirement?
Work longer. Additional years of work can fund living expenses while you delay your Social Security filing; that not only boosts your monthly benefits by approximately 8 percent when you do claim, but COLAs awarded during the interim (from age 62) will be added to your benefit. And, the dollar amount of COLAs will be larger down the road, since they'll be calculated against a larger benefit amount. Working longer also means fewer years of drawing down your retirement savings, and additional years of contributing to those accounts.
Stick with stocks. The prospect of higher retiree inflation also argues for keeping at least some portion of your portfolio in equities well into retirement.
"Putting your money only in secure investments is a good way to go broke over time, because you lose purchasing power," says Larry Rosenthal, president of Rosenthal Wealth Management Group. "Just because you reach retirement age, that doesn't mean you won't need money at 75, 85, or 95 - you'll need it to cover inflation and taxes down the road. So, you need to turn your portfolio into income and grow it at the same time."
Be a smart healthcare consumer. Learning to be an educated consumer of health insurance can help. The Medicare program has plenty of moving parts, and you can benefit by making smart buying decisions. This starts with the basic question of enrolling at the right time to avoid costly penalties and continues with a decision of whether to enroll in traditional Medicare or Medicare Advantage, the all-in-one managed-care alternative. Medicare Advantage usually doesn't charge separate prescription-drug premiums and doesn't require a Medigap plan. (In fact, Advantage participants can't buy them.) The trade-off is flexibility, since enrollees must use in-plan healthcare providers.
Also, reshop prescription-drug coverage regularly, since plans' terms of coverage for drugs often change from year to year - and so might your medication needs. One research study found that almost one quarter of Part D enrollees could save at least $500 annually by picking a cheaper plan better suited to their drug needs.
Mark Miller is a journalist and author who focuses on retirement and aging. He is the author of "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living." Mark also edits and publishes RetirementRevised.com.
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