Inflation, salary, personal views

[nisiprius]

The main point is this chart. This is my personal salary history. The blue line is "nominal", i.e. number of dollars; the green line is the consumer price index (CPI-U), the usual measure of inflation. The black line is my "real" salary, i.e. corrected for inflation and measured in year-2007 dollars. I think it's typical, but don't know. I'd love it if other Bogleheads would post similar charts. (I've had a successful but by no means stellar high-tech career).

This is a personal view from an early baby boomer who lived through the double-digit inflation of the seventies.

During my lifetime, in the United States, from a long-term planning and retirement-savings point of view, inflation has been no big deal.

A nuisance, yes. Uncomfortable and disconcerting, yes. Inflation, or rather changes in inflation, introduce uncertainty and risk in everything and makes planning difficult. It creates both winners and losers, and hits some people worse than others. You realize that past financial moves didn't prepare for it, and look like goofs in hindsight. But of course there is the potential for accidental wins as well (e.g. in my case, buying a house with a fixed-rate mortgage in 1976).

If you squint at the chart, the main takeaway is that my real salary pretty much kept pace with inflation. The only sustained downtrend was since 2000.

And by and large other investments keep up with inflation, too, in a very rough squint-at-the-chart-from-a-distance way. It doesn't feel like it if you're locked into a pre-inflation certificate of deposit, say. It can take years for the adjustments to happen, but, yeah, if inflation increases, eventually bank interest rates increase, bond coupons increase, and salaries increase. Eventually.

While stocks, of course (irony ahead) always earn a steady 7% real. (But seriously, apart from the Crash of 2008, about the worst period during my lifetime was 1965-1982, which was about zero real returns for stocks but not an actual loss).

So it seems to me that while you're earning and accumulating, even if you do nothing particular at all to hedge against inflation, it will probably pretty much take care of itself in the long run.

I'd guess the serious concerns really only come up in retirement, if too much of your income comes from sources that pay fixed dollar amounts.

Again, I'm not talking about hyperinflation, which is one kind of total breakdown of the economy. There is always scare talk, and it may be justified, from people who think the untrustworthy, incompetent, venal government is gross mismanaging the monetary system and a blowup is inevitable. But I regard that as a "black swan" that can't be prepared for. Blowups do happen, but the problem is that scare talk is continuous.

[ziggy29]

Over the course of a lifetime, sure. But most of the comments I hear about wages not keeping up with inflation has occurred in the last decade or so, and your graph confirms that by the decline in real income since about 2000.

[nisiprius]

Over the course of a lifetime, sure. But most of the comments I hear about wages not keeping up with inflation has occurred in the last decade or so, and your graph confirms that by the decline in real income since about 2000.

You're right. And, yes, we noticed!

But it's only a decade. And it is not an inflation-related problem, since it has occurred during "the great moderation," when inflation was not only low but very steady. All that inflation did was to mask the decline in real wages. If there had been no inflation, I think that whatever forces drove real wages down would have still existed; the only difference is that it would have shown up as a decline in nominal wages.

My point was not specifically about wages, but about everything. What would happen if you ignored inflation in your investment planning during preretirement accumulation? I'm saying, maybe not all that much.

[dmcmahon]

While it's nice to have your wages keep up with inflation, it hurts to have your investments lag it net of taxes, especially if there's a bout of high inflation late in your career or shortly after you retire. This is my nightmare scenario.

[muck53]

it hurts to have your investments lag it net of taxes

This has occurred to me recently, also. If you retire, and exit stocks & bonds and take up 6-12 month bank CDs, or 6 month Treasuries - which historically pay about the same as inflation (and adjust often enough, it ought to be a wash) you loose in a taxable account, because you have to pay taxes on this so called income, when it isn't income at all - you are merely trying to preserve value, spending power. And who is causing, managing, targeting this inflation you are trying to keep up with? This loss of stored value if you buried your paper money in a mason jar in the back yard ...

The more I think about it, the more I don't like it. Diversification, diversification, diversification.

To the OP - I don't have a chart, but that was my impression also during my working/accumulation years - it was a wash. First off you never did have anything much lump sum like that could loose value just sitting there, and I too remember those high inflation years - raises were huge (as was demand for my skills).

It is us with lump sums that stand to loose the most to inflation, unless we can figure out how to swim the tide. I am not sure demographics ever encountered such an major issue in times gone by - first, it was children who cared for their parents, then it was pensions that cared for the elderly, now "we're on our own" for better or worse (or we will be on our childrens doorsteps, as in days of old).

If stored value would just hold still, if costs would just hold still - I could project, I can pay all my future bills. But it doesn't work that way, does it?

Inflation ought not eat up working peoples spending power, but a globalized labor pool sure seems to be. You always make the most money doing the job no one else can do, or is willing to do. If you are very fortunate, you are also talented (and passionate about) this rare employment. I never thought about it in my youth, but one day I suddenly became an entrepreneur. I highly recommend this route. I guess it is risky, but so is employment for employers that don't stand the test of time. None of whom I once worked for, are the same companies today (bought by someone, or bankrupt).

Best of luck to all.
muck53

[market timer]

Haha, no wonder you like TIPS so much. You are one!

I'm expecting high peaks and low valleys for income, hopefully by choice.

[dbr]

It is us with lump sums that stand to loose the most to inflation, unless we can figure out how to swim the tide. I am not sure demographics ever encountered such an major issue in times gone by - first, it was children who cared for their parents, then it was pensions that cared for the elderly, now "we're on our own" for better or worse (or we will be on our childrens doorsteps, as in days of old).

muck53

Far and away the worst situation is the person on a fixed pension, effectively equivalent to a wage freeze under the worst possible conditions.

[muck53]

Far and away the worst situation is the person on a fixed pension, effectively equivalent to a wage freeze under the worst possible conditions.

This is essentially the problem with the annuity idea (non inflation indexed). Great, I turn my lump sum into guaranteed income and next month I get a check for $3K, and will get a check for $3K every month for the rest of my life. Say I am age 65 and live to average age 80 - what the heck is that $3K check worth 15 years later (no one knows, but with any inflation - not pretty).
muck53

[ziggy29]

Far and away the worst situation is the person on a fixed pension, effectively equivalent to a wage freeze under the worst possible conditions.

Pretty much true, especially if they don't have other investments that will help them at least partially keep up with inflation.

At least to some degree, SS will do that. But it alone can't keep you up with inflation (especially not the kind retirees feel the most) if the rest of your income is not protected from the ravages of inflation.

[sport]

Another problem is life insurance. You don't hear much about this, but it can be a real problem. Suppose a young wage breadwinner has what she believes is an adequate amount of term life insurance. Then inflation hits hard. One day she realizes that her life insurance is no longer adequate. So, she tries to buy more, and is turned down due to new health problems. Sure she can keep her old policy, but she is stuck. It is inadequate for the needs of her family, and she cannot buy more. This can be a serious problem.

Jeff

[MP173]

That is really an interesting chart. Do you care to share how you created it?

Did you use income information off of your SS statement? How about CPI...where did you gather that? What formula did you use to determine the "Real income"?

I assume you used Excel spreadsheet and then created a chart....is that correct?

We entered the workforce about the same time, I started full time in 1977, so we have experienced the huge inflation of the late 70's and early 80's. At that time, it just wasnt that big of a deal to me.

Now, it is.

ed

[ziggy29]

Another problem is life insurance. You don't hear much about this, but it can be a real problem. Suppose a young wage breadwinner has what she believes is an adequate amount of term life insurance. Then inflation hits hard. One day she realizes that her life insurance is no longer adequate. So, she tries to buy more, and is turned down due to new health problems. Sure she can keep her old policy, but she is stuck. It is inadequate for the needs of her family, and she cannot buy more. This can be a serious problem.

True. I'd err slightly on the side of buying more than you need, but not to "gross overkill" levels.

I know when we bought term life for my wife through USAA, they had certain "tiers" above which you'd get a price break. I believe they were $100K, $250K, $500K, $1M and so on. That meant $250K was about the same price as $200K, $400K about the same as $500K and so on. So it usually made sense to go up to the minimum level of the next "tier" of pricing.

[Juan]

I entered the workforce in June 05. My salary was upped 5% in 2006, and has remained at the exact same level for three years. ("Sorry, we can't afford Cost-of-living increases this year"; and upon switching jobs I was offered the exact same salary at my new position at two distinct job offers).

When I review pension accounting assumptions, I'm skeptical when I see expectations of 3-5% yearly increases in compensation. Then again, 8% growth in pension funds is probably just as optimistic.

Such are the consequences of a lax job market, I suppose, and the commodification of the entry-level worker.

[preserve]

So it seems to me that while you're earning and accumulating, even if you do nothing particular at all to hedge against inflation, it will probably pretty much take care of itself in the long run.

To me it highlights the point that an individual should strive hard to stay healthy and continually improve their skills as a worker. It is the best way to fight inflation, or better yet fight the financial markets.

[rwcox123]

Using the information from my SS statement (so excluding my 403b etc. pre-tax contributions), I get this chart:



You can see when I got my first full-time job (1977), when I went to grad school (1984-87), and when I moved to my current job (2001). Less obvious is my marriage in 1993, when I switched careers -- since then, a steady rise! Which is due to my wife.

Since my first full year of work (1978), I'm up about 4x in real terms, or a real growth rate of about 5%. But obviously it hasn't been a smooth ride up. In fact, it took about 12 years from 1983 (last full-time year before grad school) until I was making the same again in CPI-adjusted terms.

I thank Nisiprius for posting his chart, which led me do this and think about it.

[exeunt]

I think I'm going to begin logging my yearly wages to produce a nifty chart like that.

[statsguy]

The main point is this chart. This is my personal salary history. The blue line is "nominal", i.e. number of dollars; the green line is the consumer price index (CPI-U), the usual measure of inflation. The black line is my "real" salary, i.e. corrected for inflation and measured in year-2007 dollars. I think it's typical, but don't know. I'd love it if other Bogleheads would post similar charts. (I've had a successful but by no means stellar high-tech career).

...snip...

I must be reading this wrong.... your salary has doubled (increased about 100%) while CPI has increased about 250%. That says you are falling behind not keeping up.

Stats

[TheEternalVortex]

The main point is this chart. This is my personal salary history. The blue line is "nominal", i.e. number of dollars; the green line is the consumer price index (CPI-U), the usual measure of inflation. The black line is my "real" salary, i.e. corrected for inflation and measured in year-2007 dollars. I think it's typical, but don't know. I'd love it if other Bogleheads would post similar charts. (I've had a successful but by no means stellar high-tech career).

...snip...

I must be reading this wrong.... your salary has doubled (increased about 100%) while CPI has increased about 250%. That says you are falling behind not keeping up.

Stats

Yes, you are reading it wrong. The light blue line is the nominal salary. It has increased significantly more than the CPI. That's why the dark blue line (*real* income) shows an increase.

[strafe]

It would be interesting to see a graph of change in total compensation (i.e. wages plus the notional value of health insurance & other fringe benefits). I read a Fed paper some time ago that attributed the decline in real cash wages to an increasing fraction of total compensation going toward non-cash benefits. Employees are being paid more, but with services instead of cash.

[TheEternalVortex]

It would be interesting to see a graph of change in total compensation (i.e. wages plus the notional value of health insurance & other fringe benefits). I read a Fed paper some time ago that attributed the decline in real cash wages to an increasing fraction of total compensation going toward non-cash benefits. Employees are being paid more, but with services instead of cash.

That's a good point. With recent significant increases in health care costs, just maintaining full coverage for employees amounts to a real increase in income.

This chart makes me want to keep salary data for the future. Unfortunately at this point it wouldn't be all that interesting. Also, I've apparently lost any income information for more than 2 years ago. Oh well.

[On Approach]

My curve, starting in 1978, and continuing until the present (I'm still working full time) would look very similar to yours. In the late '70s and early '80s my salary was keeping ahead of the rampant inflation at the time. After 5 years, my pay was 220% of my starting salary - and I was doing the exact same job with no additional responsibilities. After that, I also had two job changes with pay cuts - one of about 10%, the other a fraction of a percent. Some years I got 0%, and many 2% or so. But I also had years later in my career with 7% to 10% increases.

[CaptMidnight]

The main point is this chart. This is my personal salary history.

During my lifetime, in the United States, from a long-term planning and retirement-savings point of view, inflation has been no big deal.

Your salary history may well be typical of the upper middle class, to which I would guess most of the participants on this board belong. However, it would have been a very different picture if you had been among the blue collar crowd. For them inflation has been a big deal. Since their wages have not kept up, they have experienced a substantial decline in purchasing power over the past forty years, largely because they have been exposed to wage competition from the globalization of manufacturing. Most members of the upper middle class, i.e. lawyers, doctors, bankers, the professoriat, and until recently, most of the IT professions have been shielded from international labor competition by protectionist practices such as restricting immigration of skilled foreign workers. For instance, none of the advocates of health care reform that I am aware of have called for opening our borders to all doctors able to pass US licensing exams, which would be my own recommendation. Indeed, the rescue of the US banking system is another blatant and costly exerise in protectionism. It would make more sense to invite in well-managed Canadian and Indian banks, none of which has gone insolvent because of highly leveraged risky investments that failed. But that's not a suggestion we encounter in the main stream media either.

Those who have been protected from labor competition at that same time that inflation was moderated because real costs of many manufactured items declined due to globalization have indeed had the best of both worlds.

[saurabhec]

For instance, none of the advocates of health care reform that I am aware of have called for opening our borders to all doctors able to pass US licensing exams, which would be my own recommendation.

Until healthcare reform initiatives take steps to control medical cost inflation by creating more doctors through growth of both US and foreign MDs, nothing will happen. It is shocking to me how many Americans accept poor levels of service by doctors and blatant, mercenary cost padding without complaint, but get riled up over controls imposed by health plans. Like most nations, I think the average person in the US has too high a regard for physicians who are seen as gods, and never take a skeptical look at their incentives and motivations. While I think it is fair to say that the quality of a US medical education is superior to most countries in the world, the elimination of competition has led to poor commitment to patients in terms of responsiveness and access, as well as rampant medical cost inflation.

[MWCA]

Interesting. My wife and I have done well over the past decade. Probably because her nursing salary has gone through the roof. Amazing what demand for a profession does for wages.

[grayfox]

The main point is this chart. This is my personal salary history.

During my lifetime, in the United States, from a long-term planning and retirement-savings point of view, inflation has been no big deal.

Most members of the upper middle class, i.e. lawyers, doctors, bankers, the professoriat, and until recently, most of the IT professions have been shielded from international labor competition by protectionist practices such as restricting immigration of skilled foreign workers.

That is a good point. And as the graph shows since 2000 white collar workers like engineers, scientists and computer programmers are no longer shielded from international labor competition. Businesses like Microsoft have been steady and unrelenting in lobbying Congress for expansion of H1-B visa program. Most engineering departments I have seen in the past ten years are now largely staffed with immigrants from Asia. It is not just in the U.S. either. If you go to U.K. you find that all the plumbers are from Poland. People from low wage countries migrate to where the wages are high, which drives down the high wages.

So real pay goes down in high wage places as a result of globalization. Globalization is good for employers, bad for those native U.S. workers used to high wages.

[biasion]

I was actually speaking with my father just last night about how neither of us never ever want to completely retire just for this reason. The only treasure that cannot be stolen through the usual means of inflation, taxation, or outright strong armed confiscation, unless they imprison you, is your human capital.

The decision to never retire gives you a lot of inflation protection, and I very much agree that if you keep working, inflation may introduce some short term discomfort, but over the long haul you'll be fine. Yes, eventually, even if the currency goes blotto, if you have some hard assets including a house and/or your human capital and maybe a few gold coins, you will be fine. I know a lot of people this happened to sometime in the 1944-1946 time frame in their early adult lives, many of them related to me. They were fine. But someone retiring in the late 1930's living off just their "bank accounts" would have been royally screwed with no way out.

However, the prospect of retiring with the triple threat of a low return, even higher taxation, and higher inflation is daunting. Inflation alone is one thing: if that were the only tax paid everyone would be fine, but there is a system of double confiscation where you have to pay taxes on gains that also parallel inflation. Perhaps making any increase in wealth up to the year's inflation numbers tax free would also ease the pain, but I cannot fathom any way to safely retire with any less than a few tens of millions of 2009 dollars, which I will probably never have even with a high savings rate.

I'll keep my day job!

[CaptMidnight]

For instance, none of the advocates of health care reform that I am aware of have called for opening our borders to all doctors able to pass US licensing exams, which would be my own recommendation.

Until healthcare reform initiatives take steps to control medical cost inflation by creating more doctors through growth of both US and foreign MDs, nothing will happen. It is shocking to me how many Americans accept poor levels of service by doctors and blatant, mercenary cost padding without complaint, but get riled up over controls imposed by health plans. Like most nations, I think the average person in the US has too high a regard for physicians who are seen as gods, and never take a skeptical look at their incentives and motivations. While I think it is fair to say that the quality of a US medical education is superior to most countries in the world, the elimination of competition has led to poor commitment to patients in terms of responsiveness and access, as well as rampant medical cost inflation.

If you haven't already seen it, you might enjoy this article from this week's New Yorker.
It's written by a doctor/journalist about the overuse component of health care inflation and how it may be largely attributable to doctors themselves gaming the system. His favorable mention of the Mayo Clinic as a counter-example is very interesting.

http://www.newyorker.com/reporting/2009 ... ct_gawande

I wouldn't dismiss the 31% skim by health insurers as blithely as Gawande, but the article is provocative.

[TheEternalVortex]

The main point is this chart. This is my personal salary history.

During my lifetime, in the United States, from a long-term planning and retirement-savings point of view, inflation has been no big deal.

Your salary history may well be typical of the upper middle class, to which I would guess most of the participants on this board belong. However, it would have been a very different picture if you had been among the blue collar crowd. For them inflation has been a big deal. Since their wages have not kept up, they have experienced a substantial decline in purchasing power over the past forty years, largely because they have been exposed to wage competition from the globalization of manufacturing. Most members of the upper middle class, i.e. lawyers, doctors, bankers, the professoriat, and until recently, most of the IT professions have been shielded from international labor competition by protectionist practices such as restricting immigration of skilled foreign workers. For instance, none of the advocates of health care reform that I am aware of have called for opening our borders to all doctors able to pass US licensing exams, which would be my own recommendation. Indeed, the rescue of the US banking system is another blatant and costly exerise in protectionism. It would make more sense to invite in well-managed Canadian and Indian banks, none of which has gone insolvent because of highly leveraged risky investments that failed. But that's not a suggestion we encounter in the main stream media either.

Those who have been protected from labor competition at that same time that inflation was moderated because real costs of many manufactured items declined due to globalization have indeed had the best of both worlds.

That's not true. Manufacturing wages in 1975 were around $6.16 and the CPI was 53.8. In 2004 they were around $23.17 and the CPI was 188.9.

So in 1975 dollars, the wages would have been about $6.60, which is not a big increase, but it certainly isn't a "substantial decline in purchasing power".

[TheEternalVortex]

So real pay goes down in high wage places as a result of globalization. Globalization is good for employers, bad for those native U.S. workers used to high wages.

That's not at all true. In fact real *total compensation* has NOT been declining since 2000. As was noted earlier in the thread, benefits have increased significantly as a share of compensation, so looking at wages alone is misleading:


Once you take into account benefits, workers in the US *have* enjoyed real wage growth since 2000.

[junior]

So real pay goes down in high wage places as a result of globalization. Globalization is good for employers, bad for those native U.S. workers used to high wages.

That's not at all true. In fact real *total compensation* has NOT been declining since 2000. As was noted earlier in the thread, benefits have increased significantly as a share of compensation, so looking at wages alone is misleading:


Once you take into account benefits, workers in the US *have* enjoyed real wage growth since 2000.

I assume if benefits have gone up then its solely to match the increasing costs of health care. Are health care costs a sizable part of the cpi calculation?

[junior]

The main point is this chart. This is my personal salary history. The blue line is "nominal", i.e. number of dollars; the green line is the consumer price index (CPI-U), the usual measure of inflation. The black line is my "real" salary, i.e. corrected for inflation and measured in year-2007 dollars. I think it's typical, but don't know. I'd love it if other Bogleheads would post similar charts. (I've had a successful but by no means stellar high-tech career).

This is a personal view from an early baby boomer who lived through the double-digit inflation of the seventies.

During my lifetime, in the United States, from a long-term planning and retirement-savings point of view, inflation has been no big deal.

What about from people who are holding 30 year bonds? William Bernstein seems to think inflation risk is a concern in this situation.

[superlight]

As time goes on I come to the conclusion that standard measures of inflation have less and less meaning for me. Right now I think they have essentially no meaning.

Once you own your house you're off the board for the largest item in the equation. Remember that great old graphic at the NY Times:

http://www.nytimes.com/interactive/2008 ... APHIC.html

If you buy a Prius (like me and possibly "nisiprius") you can take some fuel costs off the table. Heh. My fuel costs are 0.46% of my income, versus the average of 5.2% quoted in that picture.

I'm sure CPI has a use in national strategy, but in personal finance ... not so much. Or the real lesson should be how to avoid it.

[grayfox]

So real pay goes down in high wage places as a result of globalization. Globalization is good for employers, bad for those native U.S. workers used to high wages.

That's not at all true. In fact real *total compensation* has NOT been declining since 2000. As was noted earlier in the thread, benefits have increased significantly as a share of compensation, so looking at wages alone is misleading:


Once you take into account benefits, workers in the US *have* enjoyed real wage growth since 2000.

From the chart you posted, how can you conclude that real total compensation have increased since 2000? Your chart shows benefits as a percent of total compensation increasing from about 27.5% in 2000 to about 30% in 2006. What does that prove? You would have to produce chart showing real total compensation to see if has increased or decreased.

For instance if real benefits stayed the same and real wages decreased as nisiprius's chart shows, then "benefits as a percent of total compensation" would increase.

Also note that we were talking about real compensation decreasing, not nominal compensation. In the OP chart nominal wages increased, but real wages decreased. Real is all we really care about.