In 2015, a retired person in the United States who received maximum social security benefits got $2699 per month, which represented a 1.7% cost of living adjustment (COLA) over 2014. (a) Determine the monthly benefit in 2018 if the COLA adjustments are 1.5%, 2.1%, and 2.7%, respectively, for the next 3 years. (b) Assuming the average annual inflation is 2.0% per year, determine if the monthly benefits in 2018 have more or less purchasing power in current-value terms assuming the 3 years of COLA adjustments above.
What will be an ideal response?
(a) Total per month = 2699(1.015)(1.021)(1.027) = $2872.53
(b) CV purchasing power = 2872.53/(1.02)³ = $2706.85
Since $2706.85 > $2699, the CV purchasing power is slightly more.
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