By Professor Anthony Rivieccio MBA PFA
I had a client come into my office recently with a “NYCERS” employee retirement letter. She wanted me to tell her what it meant.
After review, I told her it was her cost of living adjustment ( COLA).
“Beginning in September of 2020, your COLA payment has increased 1%”.
She was extremely disappointed. So was I, for having to explain it to her.
The annual inflation rate for the United States is 1.3% for the 12 months ended August 2020 as compared to 1.0% previously, according to U.S. Labor Department data published on September 11, 2020.
I tried to explain to her what makes inflation go up. “For example, rapid wage increases or rising raw material prices are common causes of inflation.
The sharp rise in the price of imported oil or rising energy prices causes the cost of producing and transporting goods to rise”. So in essence, the cost of materials or labor makes the end product go up.
I further mentioned to her, ” Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for products and services”.
Then she asked me,” is inflation going up, good or bad”? .
I mentioned, “When inflation is too high , it is not good for the economy or individuals. Inflation will always reduce the value of money, unless interest rates are higher than inflation. And the higher inflation gets, the less chance there is that savers will see any real return on their money. Thus, with low inflation, your getting more value with your money”.
Then she goes, ” But in 2019, President Trump said the economy was booming. Inflation should have gone up. And when I go to the grocery store, I was just telling my girlfriend, the prices are sky high”.
While I told her that her COLA money was adjusted on a yearly basis, I also tried to warn her that her COLA Social Security check in November will probably be around the same percentage.
Then she asked me the ultimate question.
“I still don’t totally understand, if the economy was booming in 2019, unemployment went down, then why is my COLA adjustment so low in 2020”?.
I told her, “You know inflation, from 1.0% in 2019 to 1.3% in 2020 is a 23.1% increase”.
But then she reminded me, ” yeah but I’m getting 1.0% not the 1.3% so Trump is keeping 23% of my money.I know who I’m voting for in November.
Professor Anthony Rivieccio, MBA PFA, is the founder and CEO of The Financial Advisors Group, celebrating its 24th year as a fee-only financial planning firm specializing in solving one’s financial problems.