Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Social Security COLA
Transcript
- Lucas: About forty percent of retirees rely on Social Security for more than half their income. And every year they get a cost of living adjustment — a COLA — based on something called cpi w, a sub-index of the consumer price index that tracks spending by urban wage earners and clerical workers. Luna: Right, and the problem is that cpi w isn't really built for retirees. It measures the spending patterns of people who are still working — not people in their seventies and eighties. Lucas: Exactly. The Bureau of Labor Statistics actually publishes a separate index called cpi e — the experimental index for the elderly — that weights categories differently. Healthcare gets a much bigger share in cpi e. And healthcare costs have been rising faster than overall inflation for years. Luna: So the COLA is systematically understating the real cost increases retirees face. That's a quiet erosion. Lucas: It really is. And look, this isn't some niche academic point. The Social Security Administration itself has studied it. Their own actuaries have shown that switching from cpi w to cpi e would increase the COLA by roughly 0.2 to 0.3 percentage points per year on average. That compounds. Luna: And the irony is, we just got the May CPI print a couple of weeks ago — the all-urban CPI hit 334.0, up from 332.41 in April. That's still running above the Fed's target. But the COLA for next year is based on the third-quarter average of cpi w, which tends to run a bit lower. Lucas: Right, and if you look at the ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — it's at 2.26 percent as of yesterday. That's actually come down a little from last year, but it's still above where the Fed wants it. Luna: But the point is, even if headline inflation settles around 2.5 percent, retirees on cpi w might only get a COLA of 2.2 or 2.3 percent. And their actual expenses — especially healthcare — are rising at 4 or 5 percent. Lucas: Let me give listeners a concrete example. Someone who retired in 2010 with a $1,500 monthly benefit has seen their nominal benefit rise with each COLA — but in real, inflation-adjusted terms, their purchasing power has actually declined. The Center for Retirement Research at Boston College estimated that between 2000 and 2020, the cumulative loss was about 4 percent. Luna: And that's a slow bleed. You don't feel it month to month, but over a decade it's significant. Lucas: And if our conversations about protecting purchasing power have helped you think about your own retirement planning, or even just made you more aware of how these adjustments work — well, that's why we do this show. We keep it ad-free because we want the information to be accessible to everyone, no corporate sponsors dictating the angle. If that's valuable to you and you'd like to support it, there's a simple way — buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure, just an option for those who find the show useful. Luna: Yeah, it's a small way to keep this independent. And honestly, the COLA conversation is a perfect example of why we need independent voices — there's a lot of noise out there. Lucas: So back to that gap. There have been legislative proposals to switch the COLA to cpi e. The most recent one I saw — the Social Security COLA Fairness Act — was reintroduced in the House last year. It hasn't moved, but the idea keeps coming back. Luna: What's the argument against it? I mean, if cpi e more accurately reflects what seniors spend, why wouldn't we switch? Lucas: Cost. The Social Security Trustees estimate that switching to cpi e would increase long-term program costs by about 0.2 percent of taxable payroll. That's not trivial when the trust fund is already projected to be depleted around 2034. Opponents argue it would accelerate the insolvency date. Luna: So it's a trade-off — more accurate benefits now versus a slightly earlier funding crisis down the road. But if we don't fix the underlying funding gap anyway, it's sort of a false choice. Lucas: Exactly. And that's the bigger conversation — structural reform. But in the meantime, individual retirees have to navigate the system as it is. One practical takeaway: if you're retired or close to it, don't automatically assume your COLA covers your real cost increases. You should build in a buffer. Luna: Right, like keep a portion of your portfolio in assets that tend to keep pace with inflation — TIPS, I-bonds, maybe some equities. Not all in fixed-income. Lucas: And don't forget that Medicare Part B premiums are often deducted directly from Social Security checks. Those premiums have been rising faster than the COLA in several recent years, which means net benefits can actually go down. Luna: That's a real gut punch. You get a letter saying your benefit went up by 2 percent, but your Medicare premium went up by 6 percent, and your net check shrinks. Lucas: It happens. In 2022, the COLA was 5.9 percent — a big number — but Part B premiums also jumped 14.5 percent, and many retirees saw little net increase. So when people ask me if Social Security is keeping up, I say: it depends on which costs you're talking about. Luna: And that's why the cpi w versus cpi e debate matters. It's not just a wonky measurement issue — it's about whether millions of retirees can afford their rent, their medications, their food. Lucas: Let's talk about one more data point. The personal consumption expenditures price index — the PCE — which the Fed watches more closely, came in at 131.5 in May, up from 130.94. Core PCE, excluding food and energy, hit 130.1 from 129.67. So both measures are still creeping up. Luna: And the Fed funds rate is at 3.63 percent — flat for now — but there's chatter about a possible hike in July, especially after Governor Waller's comments yesterday. Lucas: Right, he said the Fed shouldn't 'fight the last war' but also warned hikes are still possible. So inflation isn't dead, and that means the COLA for 2027 might actually be decent — but it still won't align with what seniors experience if we stay on cpi w. Luna: So what's the bottom line for someone listening who's retired or planning to retire? Lucas: Don't assume the COLA will preserve your purchasing power. Plan as if it won't. Keep a diversified portfolio, consider delaying benefits to get a higher base if you can, and factor in that healthcare costs will likely outpace the adjustment. And if you're politically inclined, let your representatives know that cpi e matters. Luna: It's one of those quiet structural issues that doesn't get a lot of press. But for the people living it, it's huge. Lucas: It is. And that's why we keep coming back to it. Next episode, we'll look at another category where inflation is sneaking up on you. I've got one in mind that might surprise you. Luna: I'm curious. See you then.