Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Social Security COLA
Transcript
- Lucas: The Senior Citizens League recently calculated that Social Security benefits have lost about a third of their purchasing power since the year 2000. And the culprit, as you might guess, is inflation that consistently outpaces the annual cost of living adjustment. Luna: That's a huge number. I mean, the COLA is supposed to fix exactly that problem, right? So what's going wrong? Lucas: The issue is the index used. Social Security's COLA is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers — cpi w. That tracks spending of working-age people, not retirees. And retirees spend a much bigger share of their income on healthcare and housing, which tend to rise faster than the overall basket. Luna: So the COLA is essentially measuring the wrong inflation for the people who need it most. How much of a gap are we talking? Lucas: The Bureau of Labor Statistics also publishes a Consumer Price Index for the Elderly — cpi e — which weights things like medical care more heavily. Estimates suggest that if COLA used that index, benefits would be roughly 2 to 3 percent higher each year on average. That compounds significantly over a 20- or 30-year retirement. Luna: And Congress has talked about switching to cpi e before, but it never happens. So what can a listener actually do about this gap themselves? Lucas: That's where we get into the practical strategies. But before we go there — and I know this is a little off-topic — it's worth noting that conversations like this are exactly why we keep this show ad-free. Luna: Yeah, we don't have some insurance company or annuity seller whispering in your ear. The advice is straight. Lucas: Right. And if that independence is valuable to you, the link to support our no-ads choice is buy me a coffee dot com slash fexingo. That's all lowercase. It helps us keep doing deep dives like this without commercial interruption. Luna: Now, back to protecting your Social Security buying power. Lucas, you mentioned strategies? Lucas: Three that stand out. First, delay claiming benefits as long as you can — ideally until age 70. Your benefit increases by about 8 percent for each year you wait past full retirement age, which is a guaranteed inflation-adjusted raise that the COLA shortfall can't touch. Luna: That makes sense. But not everyone can wait. What if you need the income earlier? Lucas: Then look at using a portion of your portfolio to fill the gap. Series I Savings Bonds are a good tool here — they pay a rate that tracks CPI, so they're one of the few assets where the return explicitly adjusts for inflation. The current composite rate is around 4.3 percent, based on the latest CPI data. Luna: And I Bonds are state tax free, which is a bonus if you live in a high-tax state. But there's a purchase limit, right? Lucas: Ten thousand per person per year in electronic bonds, plus another five thousand in paper if you use your tax refund. So it's not a solution for a large portfolio, but it's a meaningful hedge for someone retiring in the next few years. Luna: Third strategy? Lucas: Adjust your asset allocation to favor sectors that tend to outperform during sticky inflation. Healthcare stocks and real estate investment trusts, for example, often have pricing power that protects their dividends. And consider Treasury Inflation-Protected Securities for the bond portion of your portfolio — TIPS principal adjusts with CPI. Luna: Let's tie this back to the current picture. We just saw June CPI come in at 332.6, which is down from 333.98 in May. So headline inflation is cooling slightly. But the PCE price index, which the Fed prefers, actually ticked up to 131.5 from 130.94. What does that mixed signal mean for Social Security recipients? Lucas: It means the COLA for next year will likely be smaller than last year's — maybe around 2.5 to 3 percent if the trend continues. But as we discussed, even a 3 percent COLA may not cover a retiree's actual cost increases if they're paying more for Medicare premiums and prescription drugs. Luna: And the breakeven inflation rate on 10-year TIPS is about 2.26 percent right now, which tells us the market expects inflation to average around that level for the next decade. That's below what we've seen recently. Lucas: Exactly. So the risk is that inflation stays above 2.26 percent, and retirees with fixed COLAs get squeezed. That's why a diversified approach — combining delayed claiming, I Bonds, and TIPS — can help close the gap. Luna: One more thing: the Senior Citizens League data also shows that the average Social Security recipient has lost about $1,300 per year in purchasing power since 2010. That's real money. Lucas: It's the quiet erosion that doesn't make headlines but changes retirement lifestyles. The good news is that awareness is the first step. Once you know the COLA formula is working against you, you can build a plan around it rather than assuming the government will fix it. Luna: And maybe one day Congress will switch to cpi e. But until then, it's on us to cover the gap. Lucas: That's the takeaway. Thanks for listening, and we'll be back next time with another way inflation might be quietly eating something else in your financial life.