Within the past 30 days we’ve gotten two pieces of disturbing news on the insurance front. The first is that our health insurance premium is going up by about 25% for 2019. The second is that our home insurance just tripled. They’re not just rising, our insurance premiums are exploding.
Now all the “official sources” are saying there’s no inflation out there, or something close to it. According to US Inflation Calculator.com the year-to-date inflation rate for 2018 is just 2.5%. That figure is certainly based on official statistics, like the change in the Consumer Price Index (CPI).
I don’t know about you, but I’ve become increasingly cynical about official statistics. According to John Williams’ Shadow Government Statistics, the real rate of inflation is about 6%, based on the way it was calculated in 1990.
That’s closer to the truth, but it still doesn’t capture the inflation rate in certain broad categories. When you look at what’s happening with health care, education, utilities, and certain types of insurance coverage, the numbers are well into double digits.
I’ve written about the likelihood of bogus inflation statistics in the past, but the continuation of this farce is frustrating.
It’s another of those topics where I’d rather be wrong.
Our Health Insurance Gouge
Fortunately, we have our health insurance coverage through my wife’s employer. We’re responsible to pay only the employee portion, and not the entire premium. In that respect, the increase isn’t as bad as it seems at first glance.
We’ve experienced the crushing burden of paying a monthly premium of nearly $2,000 in 2017, after my wife lost her job and we had to go on the COBRA plan. (I often wonder if the sponsors of that program ever considered the irony of that moniker, and how truly “venomous” that program would become, but I digress.)
What’s perhaps most disturbing about the increase is that there’s been no corresponding increase in benefits. We’re still on the hook for up to $5,500 per person out-of-pocket, and still we got a 25% increase in the premium.
And even though the increase is minimized, only applying to our portion of the total premium, there’s still plenty to be concerned about with that increase.
I don’t want to paint our situation as unnecessarily dire. We’ll absorb that increase. But there are two factors looming in the background that can’t be ignored:
- Double-digit Increases in health insurance premiums have become routine. This year’s 25% increase may be followed by a 25% increase in 2020, or maybe even 50%. The trend is downright predatory.
- If my wife loses her job, we’ll be stuck in another COBRA situation. Should that happen, we’ll experience the full weight of the increase on the entire premium. That’s in addition to the fact that a COBRA plan administrator is legally entitled the tack on a 15% administrative fee.
There are no alternatives either. My wife and I are too young for Medicare, which will send us to the health insurance exchange. More misery awaits there.
The Home Insurance Gouge
The percentages on this increase or much uglier, but that’s mitigated by the fact that the premium was much smaller to begin with. But a tripling of the rate?
As best I can tell, that’s the change in premium after I cut back on certain coverages. If I kept it at the level it’s always been, the premium increase would have been four or five times higher.
We’ve had the same home insurance for the past four years. But about a month ago we got a notice from the carrier informing us we are being dropped. And mind you, we’ve never had a claim.
We could shop for a new carrier, at least in theory. But there’s a complication.
Our home insurance is bundled with our auto insurance. Our auto insurance carrier isn’t the home insurance carrier. Instead, they contract home insurance out to another provider. The reason our policy was dropped was because our auto insurance company severed its ties with the home insurance company.
Whatever we might save in switching to a different carrier, we would lose from the bundling discount we get for having the home and auto policies together. Checkmate!
When I contacted our auto insurance provider about this situation at the very beginning, they assured me the rate on the new home policy would be comparable. I guess that was a canned public relations response. Reality certainly went in a different direction.
You’ve gotta tip your hat to these insurance companies. They really know how to lock us into no-way-out arrangements. They’ve got the lid on so tight that while you “always have a choice”, you really don’t.
The Silver Lining: Our Auto Insurance Premium Dropped
As proof of the saying “God will not give you more than you can handle” (loosely from 1 Corinthians 10:13), our auto insurance premium is falling on renewal.
It’s slated to drop by about $30 per month. But to put that in perspective, that represents less than a quarter of the increase we’re experiencing with home and health insurance.
It’s also worth noting that the auto insurance premium isn’t dropping out of the goodness of insurance company’s heart. It’s only happening because a moving violation my son had about four years ago is finally falling off our collective records.
We’re certainly glad for any relief we can get. But as you can see, one doesn’t offset the others. After crunching all the numbers, we’re still taking a big hit on the net increase.
Where Will This End?
I’d love to say that price spiral will come to an end. But that hasn’t been true during my conscious lifetime, which goes back to about the 1970s. We had inflation then, and we have it now. It declined from the 1970s to the 1980s, and it’s generally been better behaved. But it hasn’t disappeared.
A big part of what has changed is the way inflation is being reported. The Bureau of Labor Statistics has employed a number of techniques to produce a lower inflation rate, starting in the early 1980s.
In addition to substituting less expensive alternatives for certain categories (for example, that people might switch to chicken from beef), there’s also a neat strategy called hedonics. That’s where the BLS “adjusts” price levels to accommodate higher product quality.
There are two problems with this practice. The first is that improvements in quality are highly subjective. For example, the price of a particular product rises by 10%, and they say there was an 8% improvement in quality. That means the net price increase was 2%. Taking it to the extreme, they can even say the quality improvement was 12%, resulting in a 2% decline price.
The second is that it doesn’t account for a lack of alternatives. If a particular product has no alternative, and the nominal price rises by 10%, that’s the real rate of the price increase. Since I don’t have a choice to buy a cheaper alternative, I’m stuck paying the higher price. That’s the real rate of inflation no matter how it’s manipulated.
Those are just the technicalities of inflation. The very fact that the BLS employs those techniques is deeply disturbing in itself. If the real rate of inflation really was low, that kind of manipulation would be completely unnecessary.
Why Inflation is a MUCH Bigger Problem than Just Rising Prices
The very word “inflation” sounds almost trivial. But the outcome of it isn’t. This is especially true if the real rate is manipulated. If the official inflation rate is 3%, but the real rate is 5%, we face the following outcomes:
Inadequate pay raises. Pay increases are largely tied to the inflation rate. A 3% inflation rate means a 3% raise. But if the real rate of inflation is 5%, you’re falling behind by 2% each year. Over 10 years, you fall behind by 20%. This is why everyone feels the pressure of an economic squeeze. It’s not our imaginations, even if we can’t see what’s happening.
Social Security increases. Same situation here. Benefits are increased by increases in the Consumer Price Index (CPI). If that index reflects a 3% increase, but real price level increases are 5%, you just got a 2% reduction in benefits.
Income tax brackets. Tax Brackets are “indexed” for inflation. If the BLS reports the CPI is up 3%, the income levels for a particular tax bracket will increase by 3% to adjust for inflation. But if the real rate of inflation is 5%, your taxes are going up a bit. When you multiple that “little bit” by several years, you begin to appreciate the squeeze it produces.
Long-term planning, including retirement. Americans are obsessed with retirement. There are boatloads of retirement calculators and articles telling you how much money you’ll need to retire comfortably. Some take inflation into account, but when they do, it’s the lower official rate.
If the real rate is higher, you’ll arrive at retirement with inadequate savings. Worse, once you retire, the real rate of inflation will gradually eat away at both your retirement savings and income.
What’s the Right Strategy to Deal with “No Inflation” Inflation?
Unless you work in a job or a business that enables you to increase your income rapidly, inflation is a serious trap. I believe it’s one of the major reasons for all of the distortions and dysfunctions occurring throughout the country. People are struggling against an invisible economic force they neither understand, nor can recognize.
It puts us in a situation where we need to be perpetually engaged in two strategies:
That’s been the reality for at least the past decade. It seems it will continue for the foreseeable future. We don’t really have an option – we either continue working both strategies continuously, or we must get comfortable with a lower standard of living.
Do you have any similar inflation “war stories” to share? Expenses where inflation is being understated? What are you doing to deal with the problem no admits exists, but is our day-to-day reality?