Inflation trumps average paychecks

I'd like to say a few words about the futility of work.

I'm serious.

Take a look around. Today, we're all 24/7, strutting with BlackBerries and Bluetooth, miles from the long-lost desk and office, not to mention home. At the risk of being rude, I'm wondering if all this frenzied effort pays off.

We know it does for some.

If it didn't, Starbucks and Whole Foods would not exist. There wouldn't be enough people who can afford $3 for a cup of coffee or $2.69 a pound for free-range organic chicken.

But the operative word here is "some." It's time for Joseph Vineyard, the trendy guy who eats free-range chicken, to meet Joe Six-Pack.

If you look at the averages, the statistics give a simple message: Hard work does not equate to economic progress. It hasn't for decades. We may need hard work to keep body and soul together (not to mention pay the Visa bill), but average-worker paychecks clearly show that inflation continues to trump wage gains for most U.S. workers.

This is not a recent problem. Twenty years ago I wrote a column titled "The Coming War Between Generations." It showed that the average worker had lost ground to inflation from 1970 to 1987. The same worker was also losing ground to retirees because the average retiree Social Security benefit was also rising faster than workers' wages.

Since workers pay the bills for Social Security recipients, that's not a healthy situation.

The situation got worse over the next nine years. Workers' wages grew slower than inflation in all but one of the nine years from 1988 through 1996, sometimes by a lot. In 1990, for instance, workers' wages rose 3.3 percent, but the rate of inflation was 5.4 percent.

And, again, the average retiree's Social Security check grew faster than the average worker's paycheck in seven of the same nine years. (Workers did better than retirees in two years, 1994 and 1996.)

Surely the last 10 years have been better, right?

Only slightly. The percentage of increase in the average worker's wages has been larger than the percentage of increase in the average retiree's benefit check in all but two of the last 10 years, 2004 and 2005.

When it comes to the battle against inflation, the score isn't quite so good. Inflation has trumped wage gains in four of the last 10 years — 2001, 2003, 2004 and 2005.

Unfortunately, that isn't the end of the story.

Both workers and retirees have the cost of health insurance deducted from their paychecks. Medicare premiums are subtracted from the paychecks of retirees. Medicare part B premiums rose over 100 percent from 1997 to 2006, soaring from $43.80 a month to $88.50. (Today, they range from $93.50 to $162.10, depending on your household income.)

Workers had a similar experience with private insurance. In 1997 the average worker earned $431.86 a week. By June 2007 the average worker paycheck was $589.52 a week, an increase of 36.5 percent. Inflation took 33.7 percent of wage gains.

That leaves a real gain of about 1.8 percent, or $10.61 a week. How much do you want to bet that all of that gain, and then some, has gone to higher health-insurance premiums and higher co-pays? I'm confident that the after-health-insurance income of workers and retirees has declined over the last 10 years.

That's a long time to push a rock up a hill, only to have it roll back down.

That's why Joseph Vineyard needs to start thinking about Joe Six-Pack. So far, Joe has coped quite well. If old enough, he has retired and enjoyed a tax-free check that rises faster than his old paycheck most of the time. That's a lot better than working, and it tells why people retire at 62.

If younger, he has refinanced his house to provide the spending power he couldn't find in his paycheck, no matter how hard he worked.

But the easy borrowed money just ended.

What does it all mean?

Simple. We face two fundamental issues: health-care costs and average paychecks. Until one goes down and the other goes up, we've got a problem.

Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com or by fax to 505-424-0938.