Thursday, December 13, 2007

Government Inflation Numbers Not Suitable for Retirement Calculations

If you are calculating your future retirement needs using the government’s inflation numbers, the consumer price index (CPI), or using the CPI for other calculations, you should keep reading. According to John Williams, an economist who runs a website called shadowstats.com, the government has been fudging the inflation numbers since the 1980s.

Since then, the government has changed how they calculate the CPI numbers several times, with each new method lowering the resulting numbers. The logic used in making these changes is flawed, and if people knew how the numbers were calculated, they would almost surely hesitate to use them.

Why would the government want to orchestrate this scam? Williams points to their Social Security obligations. The government’s Social Security payments to individuals are indexed to the CPI, and the higher the CPI, the more the government has to pay out. When one considers how huge the government’s Social Security debt is, along with the fact that there is little to no hope of them being able to pay it without some help, it makes complete sense.

People can choose whether to believe Williams or not, but he makes a convincing case that is certainly worth listening to. If you are looking for a better inflation number to base your calculations upon, Williams recommends that you add about 7 percent to the CPI. On shawdowstats.com, there is a CPI calculator tool that might be helpful. On the site Williams also discusses in more depth the various changes to the CPI calculation and their subsequent flaws.

To demonstrate the difference 7 percent can make during the course of a career, the value of the portfolio of a person contributing $5,000 a year for 40 years would take a hit of around $1,000,000 in terms of true buying power. Remember, this 7 percent is on top of the approximate 2 to 3 percent inflation number being published by the government. That means that you need to be making 9 to 10 percent in return on your money just to stay even with inflation.

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