Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Your Social Security COLA Is Playing Catch-Up
Transcript
- Lucas: Luna, here's a number that should make every retiree wince: the Social Security cost of living adjustment for 2027 will likely be under three percent, maybe even closer to two and a half. That's down from the three point two percent boost beneficiaries got this year, and a far cry from the nearly nine percent bump back in 2023. Luna: And yet, if you look at what seniors actually spend — healthcare, housing, food — those costs are still running hotter than the headline CPI number. So even a 'good' COLA can feel like it's disappearing as soon as it hits your bank account. Lucas: Exactly. And that gap is the whole story of today's episode. We're going to unpack how the COLA is actually calculated, why it so often misses the mark, and what you can do about it — beyond just crossing your fingers for a bigger number each October. Luna: Before we dive deep, a quick thought here — if these conversations have helped you think about a decision differently, or given you a new lens on your own money, a couple of dollars a month genuinely keeps this show ad-free and independent. It's buy me a coffee dot com slash fexingo, if you've gotten something out of it. Lucas: Yeah, it really does make a difference for us. And we appreciate every single person who's ever chipped in. Now, back to the COLA grind. Luna: So walk me through the mechanics. How does the Social Security Administration actually come up with that number? Lucas: Sure. The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers — that's cpi w — and it compares the average reading from July, August, and September of the current year to the same period in the previous year. The percentage change becomes the next year's adjustment. Luna: So the COLA for 2027 will be set by the data we're collecting right now, essentially. This summer's readings. Lucas: Exactly. And the thing is, the cpi w doesn't perfectly mirror what retirees actually buy. It's weighted toward younger urban workers — more gasoline, more new cars, more electronics. Seniors spend a bigger share on healthcare and housing, and those tend to inflate faster. Luna: Right. And the data we've seen recently shows the overall CPI cooling — the latest reading was up just point one percent month over month, and the year-over-year rate is around two point eight percent. But healthcare costs, for example, are still climbing at a faster clip. Lucas: That's the core problem. The COLA can lag real inflation for a retiree's actual basket by a full percentage point or more. And over years, that compounds into a serious loss of purchasing power. Luna: Let's talk about a concrete example. Suppose you get a COLA of two and a half percent next year. But your Medicare Part B premium goes up by six or seven dollars a month — which is roughly what the trustees are projecting. That one premium increase can eat up half your raise before you spend a penny on anything else. Lucas: And it gets worse, because Part B premiums are often deducted directly from your Social Security check. So your net benefit increase is smaller than the headline COLA. And if you're in a higher income bracket, you might also pay the Income-Related Monthly Adjustment Amount — the IRMAA surcharge — which can take another bite. Luna: So what does that mean for someone who's already retired and living on a fixed income? Is there anything they can actually do? Lucas: There are a few practical steps. First, don't treat the COLA as a raise — treat it as a partial cost of living catch-up. If it comes in at two and a half percent, plan your spending around the assumption that your real income just went down by a point or so, because your personal inflation rate is probably higher. Luna: That's a tough pill to swallow, but it's realistic. Lucas: It is. Second, look at where you can trim flexible spending — things like dining out or travel — before you cut into fixed costs like housing or medications. And third, consider building a bit of a buffer in cash or short-term bonds to cover the gap between when prices rise and when your COLA kicks in. Luna: That lag is real. The COLA is announced in October, but it only shows up in your January check. Meanwhile, you're paying higher prices all fall. Lucas: Right. And that's why some financial planners suggest holding enough cash to cover several months of expenses — not as an investment, but as a buffer against exactly this kind of timing gap. Luna: What about TIPS? I know you've mentioned Treasury Inflation-Protected Securities before. Lucas: TIPS can be part of the solution, but they're not a perfect hedge. Their principal adjusts with the cpi u, which again may not match your personal basket. Still, for the portion of your portfolio you want to protect against inflation, a short-term TIPS ladder can provide a steady stream of inflation-adjusted income. Luna: And it's worth noting that the ten-year breakeven inflation rate — the market's expectation — is currently around two point three percent. So the market is pricing in fairly modest inflation over the next decade, but that doesn't mean healthcare costs will cooperate. Lucas: That's a key point. The market expectation is one thing, but your personal experience can diverge significantly. And with the Fed holding rates steady — the effective federal funds rate is still around three point six three percent — real returns on cash are actually positive right now, which is rare. Luna: So maybe holding a little more cash isn't such a bad idea while rates are where they are. Lucas: Exactly. But the bigger message is: don't rely on the COLA to protect you. It's a blunt instrument. If you're retired or close to it, you need to build your own inflation buffer — whether that's through TIPS, a diversified portfolio, or simply adjusting your withdrawal rate. Luna: And for those still working, the lesson is to start planning now. The decisions you make about savings and investments today will determine how resilient you are to the COLA's imperfections down the road. Lucas: That's a great way to put it. We should also mention that the Social Security Trustees' report projects the trust fund will be depleted in the early 2030s, which could mean benefit cuts of around twenty percent if no legislative fixes are made. So the COLA might be the least of your worries. Luna: Yikes. But that's a conversation for another day. For now, the takeaway is to understand how the COLA works, plan for the gap, and don't be caught off guard. Lucas: And if you want to dig deeper into the mechanics, the Social Security Administration publishes the COLA calculation on their website — it's actually pretty readable. But for most of us, the practical step is to revisit your budget the moment you hear the October announcement, not in January when the check arrives. Luna: Good advice. And maybe a good reminder that staying informed is half the battle. Lucas: Absolutely. Thanks for listening, everyone. We'll catch you next time on Inflation and Your Money with Fexingo.