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Why Social Security Boost Is Bad News

Social Security card in a wallet.I’ve just received official notice that my Social Security benefits will rise 1.7% in 2013.

This didn’t take me by surprise. The government announced the increase back in October.

But it was another reminder of how the double whammy of low interest rates and creeping inflation is slowly but surely eroding my personal net worth.

The higher benefits represent the cost-of-living adjustment to which all Social Security recipients are entitled, based on the inflation rate.

Inflation is measured by the increase in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the current year’s third quarter over the third quarter of the prior year.

Although a CPI-W increase of 1.7% passes Federal Reserve muster, for me, pretty much any inflation is too much inflation, given the rock-bottom interest rates the Fed has imposed on savers.

During the 12 months ended Sept. 30, 2012, my investment portfolio (both taxable and tax-deferred) consisted almost entirely of government-insured CDs.

Interest on the taxable portion of that portfolio accounted for about 70% of my income. It produced an overall yield of something like 1.9%.

I did slightly better with my tax-deferred IRA accounts, which yielded a shade over 2%.

But, in determining how I fared against inflation, the question is: How much did I end up saving after taxes, expenses and donations?

My savings were less than one-half of 1% of my portfolio value.

It looks to me like I’m losing the battle against inflation.

And I expect things to get worse.

For example, the notice advising me of my 2013 COLA increase also said my Medicare Part B premiums would go up 5%.

And I suspect I’ll see an even stiffer premium hike for Medicare supplemental coverage from my private insurer.

Plus, there’s the so-called Obamacare tax on net investment income (which includes interest income), beginning in 2013.

This tax, leveled on anyone with a modified adjusted gross income of at least $200,000 ($250,000 for married couples filing jointly), will equal 3.8% of either the taxpayer’s net investment income or modified AGI above that threshold, whichever is less.

Now the Fed is telling savers to suck it up yet again, saying it would be happy with 2-1/2% inflation if unemployment remains above 6.5%!

I should be thankful, I suppose, that I’ve managed to eke out some savings during the Bernanke era.

Unfortunately, I don’t think that will continue much longer.

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