Wednesday, August 20, 2008

Inflation Pressures and Social Security

The market turned lower today partly in response to the Producer Price Index (PPI) that showed prices rising at the fastest rate since 1981, climbing 9.8% since last year. The increase in prices was much higher than expected, setting the tone for a rather gloomy day for the equity markets. Tuesday’s report came on the heels of other inflation reports, including the Consumer Price Index (CPI), that have also shown unexpectedly strong inflation readings levels.

While the market initially reacted negatively to the inflation readings, it’s important to consider that these reports are lagging. Whether the estimates for inflation were realistic could be argued; what cannot be disputed is that natural resource prices have fallen considerably over the past month which indicates lower inflation in the future. Two of the most widely followed indications of inflation – crude oil and gold – have each pulled back by more than 20% off of the highest levels reached earlier this year.

Along with the traditional price inflation reports, there was a report published warning of the effects of “Age Inflation.” Life expectancies for a 65-year old today are seven years longer than for a 65-year old in 1935 (the year Social Security was created). The report today suggests that the Social Security retirement age hasn’t kept up with changes in longevity, partially due to the political hot potato the issue has become. If the system were to reflect the original intentions when the Social Security program was created, the retirement age would be somewhere between 71 and 74-years of age today. Eventually, Social Security is going to have to reflect reality.

Studies also indicate that younger savers have not prepared adequately for retirement. Luckily for those who are over age 50, your benefits are not likely to change, but for younger folks, there is a good chance your government benefits might not come as soon as you would like. So start saving!

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