Inflation: A $1,404 Gift to Some, an Obstacle to Others in Retirement | Personal Finance | #vacation | #seniors | #elderly
Rising wages illustrate the benefits of inflation for paying down debt. Let’s say someone making $20 an hour gets a 5% raise to $21 an hour. If inflation is also 5%, then the cost to see a baseball game could also rise from $20 to $21. So, it cancels out. However, the nominal value of existing debt stays the same. Therefore, if that same person has a fixed-rate mortgage, student loans, or credit card debt, the real cost to pay down that debt just got 5% easier. Debt is simply the obligation to pay someone back, usually in the form of U.S. dollars. If a U.S. dollar is worth less than it used to be or you’re making more than you used to, then you effectively have less debt. As great as this sounds, bear in mind that inflation is a double-edged sword that can hurt retirees in the same way it helps debt holders.
A curse for retirees on a fixed income
While inflation may benefit those who borrow, rising inflation is typically very bad news for retirees. And there are a few key reasons for that.
Inflation is no friend to Social Security recipients
First and foremost, most retirees depend on Social Security as a key source of income. Benefits are supposed to be protected against inflation, but that hasn’t been the reality. Cost-of-living adjustments (COLAs) — also known as periodic benefit increases — are pegged to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This price index underestimates how much seniors spend in key areas including housing and healthcare, both of which tend to see prices rise faster than average.