Retirement Matters
February 2022
Key developments on inflation, cost-efficient pensions, and seniors’ contribution to economic growth.
2021 Inflation — Are you concerned about how inflation has impacted your buying power? Nationwide, much of the rise in inflation in 2021 has been due to price increases for shelter and used cars and trucks, according to the Bureau of Labor Statistics for the last 12 months ending December 2021. Higher used vehicle prices of 10 percent in April and 7.3 percent in May 2021 represented a staggering one third of the overall rise in consumer prices. The demand for vehicles increased as individuals saved more during the pandemic that then could be spent on buying a car. Prices of used cars soared as supply was limited. When new cars weren’t available, used cars were purchased instead. During the worst of the pandemic, auto factories all over the world shut down. As they tried to ramp back up, inventories remained low due to the semiconductor shortage, a key part for new cars. In addition, rental car companies bought up suitable used cars to replace their fleet.
Food prices also added to inflation although the increase was less than it had been in recent months. The good news is that energy prices on items like gasoline and natural gas have already declined. So, you may want to consider the higher prices on items you are actually paying. If your rent or mortgage payment didn’t change, you’re not paying more for housing. And, if you have the same vehicle, you have saved on what contributed most to recent inflation.
You probably paid more for food and energy prices which are expected to level off. In general, seniors are paying more for uncompensated out-of-pocket medical expenses as they age. But the pandemic related, higher inflation rate, is expected to be short-lived. Higher prices are likely to return to more normal levels by next year as supply chain shortages are resolved and consumers shift demand back toward services.
Michigan’s Forecast — To get the actual rate of inflation, you don’t have to look far for informed answers. In Michigan, we depend on the expertise of the University of Michigan’s Research in Quantative Economics (RSQE) as a trusted source for forecasting the Michigan economy with great success over many decades. This should be reassuring to our readers given some of the disinformation consumers may be reading on social media. Michigan’s good government practices include a long tradition of basing economic forecasts on the facts. (“Just the facts ma’am,” to use a phrase attributed to Dragnet’s Sgt. Joe Friday.)
Inflation to Drop — Inflation is measured by the Consumer Price Index (CPI) and is one of the key economic indicators reviewed each year in January. Experts from the Treasury Department and the House and Senate Fiscal Agencies meet to review their forecasts, iron out differences, and come to an agreement at the Consensus Revenue Estimating Conference (CREC). Their forecast for Michigan’s inflation rate is based on Detroit’s CPI. In calendar year 2021, it increased by 4.3 percent. It is expected to rise very slightly to 4.6 percent in 2022. But by 2023, the forecast drops to 2.5 percent, which is within range of the Detroit CPI inflation rates recorded over the last decade.
“Better Bang for the Buck” — This study confirms what we already suspected, that defined benefit pension plans are a far more cost-efficient means of providing retirement income when compared to individual defined contribution accounts, according to the National Institute on Retirement Security (NIRS). The usual defined benefit (DB) plan has a 49 percent cost advantage compared to the typical individually directed defined contribution plan. The reason is that DB plans include a longevity risk pool, have more diversified portfolios, and a higher investment return. Policy makers could consider greater support for returning to pension plans given these findings. Learn more at https://www.nirsonline.org/reports/betterbang3/.
Unexpected Retirements — A new report on “Rethinking Retirement in an Aging America,” by Terry Group and the Global Aging Institute, examines the economic, fiscal, and individual benefits of longer work lives past COVID. It reports on those seniors that continue working rather than retiring. This trend contributed to the growing U.S. labor force, or those working or looking for work, among the elderly that rose over the last two decades. However, during the COVID years, employment growth among seniors fell steeply as older American’s left jobs and socially isolated. The U.S. labor force participation for adults aged 65 and over was 8.2 percent lower by October 2021 compared to the beginning of the pandemic in February 2020. An estimated 3 million more workers retired since the beginning of the pandemic, than what would have normally left, based on their previous employment trends. This loss was significant, representing more than half of the overall drop in the U.S. labor-force participation.
Working Seniors — What are the plans for those senior workers who remained working through during the COVID times? Some of these workers are planning to stay on the job a little longer, than what they once thought, to get back the earnings lost during the slower economic activity. Others, saying “Life is Short,” are rethinking their previous retirement plans to work far into their retirement years. For those that continue working, seniors are expected to have a significant impact on economic growth as they shore up a slow growing labor force. The labor force growth rate is estimated to fall to just 0.3 percent per year by 2030 and beyond. This compares with the decade-long, average annual labor force growth rate of 0.5 percent from 2014-24.
Social Security — Field offices have been closed for all but “dire needs” due to the pandemic. A target date has been set to reopen on March 30, 2022. Stay tuned as this could be postponed if COVID cases increase.
Editor’s note: Joanne Bump currently serves as feature columnist for “Retirement Matters.” Joanne can be contacted by phone at (517) 896-2729 or by e-mail at joannebump@gmail.com.
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