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Transcript
- Lucas: If you're retired or anywhere near it, you've probably heard the good news that Social Security benefits get adjusted for inflation every year. It's called the cost of living adjustment — COLA. The bad news is that the number you get might be systematically underestimating the actual inflation you're experiencing. Luna: And this isn't just a theoretical quibble. The May CPI came in at 334.0, up from 332.41 in April. But the index used for COLA is different — it's the CPI for Urban Wage Earners and Clerical Workers, or cpi w. Lucas: Right. cpi w has a narrower basket than the headline cpi u that everyone talks about. It puts more weight on things like gasoline and rent — categories that have been running hot. And if you're a retiree, your spending is even more skewed toward healthcare and housing, which the cpi w doesn't capture well at all. Luna: So the COLA you get is based on a basket that doesn't match how seniors actually spend. That gap has been documented. The Bureau of Labor Statistics actually produces an experimental index called cpi e, specifically for the elderly. It tracks higher weights for medical costs and shelter. Lucas: And in most years since 1982, cpi e has run about 0.2 to 0.3 percentage points higher than cpi w. That doesn't sound huge, but on a $1,800 monthly benefit, that's roughly $3.50 to $5.50 less per month than you'd get if COLA used the elderly index. Over a decade, that compounds. Luna: So who's pushing back on switching to cpi e? Because it seems like a no-brainer for retirees. Lucas: There's bipartisan legislation — the Fair COLA for Seniors Act — but it's stalled in committee. The argument against is that it would add to Social Security's long-term deficit. The Congressional Budget Office estimates switching to cpi e would increase benefits by about $12 billion per year. That's real money, and with the trust fund projected to run short around 2034, lawmakers are hesitant. Luna: And there's a timing component too. The COLA for 2027 will be based on average cpi w from July, August, and September of 2026. With the ten-year breakeven inflation rate at 2.25 percent — down from 2.26 last month — markets are betting inflation stays moderate. But shelter costs are sticky, and energy could spike if we see any disruptions. Lucas: Exactly. The breakeven rate isn't a forecast, it's a market-implied expectation. If oil prices jump because of something like the Iran situation — and we saw headlines today about peace talks amid conflicting claims over the Strait of Hormuz — that could feed into gas prices quickly, which would push cpi w up more than cpi u. Luna: And the COLA only looks at third-quarter data. So if inflation spikes in the fourth quarter, you don't get compensated until the following year's COLA. That's a lag of up to 15 months. Lucas: Right. For someone on a fixed income, that's a real risk. So what can a retiree actually do about this? One option is to hold a portion of savings in Treasury Inflation-Protected Securities — TIPS — which adjust for cpi u, not cpi w. But if your personal inflation is higher than cpi u, TIPS still leave you short. Luna: So the real hedge might be to build in a buffer: maybe keep a larger emergency fund, or consider a part-time gig that generates income that can be adjusted, rather than relying solely on the COLA. Lucas: And if you're still a few years from claiming, you can model your expected COLA using the Social Security Administration's online calculator — but plug in a personal inflation rate based on your spending categories. For example, if healthcare is 15 percent of your budget, and health insurance premiums are rising 6 percent a year, your personal inflation might be 4 percent even if cpi w is at 3 percent. Luna: That's actionable. I like that. One more thing: the COLA for 2026 was 3.2 percent. That was based on third-quarter 2025 data. For 2027, with current CPI trends, some analysts estimate a COLA around 2.8 percent — but that could change fast. Lucas: And even if it comes in at 3 percent, a retiree with a $2,000 monthly benefit would get an extra $60 a month. That sounds nice, but if actual expenses went up by 4 percent, you're losing $20 of purchasing power each month. It adds up. Luna: Honestly, if this episode helped you think about your retirement income a little differently, that's what we're here for. If it was worth a coffee to you, you can support the show at buy me a coffee dot com slash fexingo. Keeps us ad-free and independent. Lucas: Yeah, and we really appreciate that. Alright, back to the numbers — there is one more thing worth mentioning about the cpi e debate. The BLS has been updating that experimental index periodically, and in recent years the gap has actually widened. In 2023, cpi e ran about 0.4 percentage points above cpi w. That's partly because medical care services inflation accelerated. Luna: So if that trend continues, the discrepancy could become a bigger political issue. We might actually see movement on the Fair COLA for Seniors Act, especially if more retirees start complaining to their representatives. Lucas: And in the meantime, you can check the BLS website for cpi e data yourself. It's not hard to find — just search 'cpi e experimental elderly index'. You'll see the monthly numbers. Compare them to cpi w and you'll get a sense of how much your COLA might be understating your true cost of living. Luna: That's a concrete step anyone can take. Great episode, Lucas. I'll be checking my own numbers tonight. Lucas: Same here. And remember, the COLA announcement for 2027 comes out in October. We'll cover it when it drops. Until then, keep an eye on those third-quarter CPI releases.