Why Social Security COLA Comes Up Short And How You Can Guard Against Inflation

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Matthew Etter, CFP®

Partner, President
Signet Financial Management
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Daniel DiVizio, CFP®, CRC®

Financial Planning Director, Wealth Management
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Although the Social Security Cost of Living (COLA) increase is the largest it’s been in four decades , it doesn’t mean that retirees are keeping up with their actual cost of living increases. Many are falling behind.

I’m not looking a gift horse in the mouth: A 8.7% COLA going into next year is good news for some 70 million Americans who rely upon the program for the bulk of their retirement income.


(Photo by Joe Raedle/Getty Images)


Will this kind of inflation adjustment last? According to The Hill, “A COLA boost of 8.7% is very rare and will likely be the largest increase ever received by most beneficiaries alive today. Historically, increases rose above 8.7% only three times. All of those hikes were decades ago — between 1979 and 1981 — which was also a time of high inflation.”

It remains to be seen, with aggressive Federal Reserve tightening, whether we will revisit the hyperinflation of the late 1970s and early 1980s. In the interim, it’s fair to question whether the Social Security COLA adequately protects retirees on fixed incomes.

Many COLA critics say that the index (CPI-W) used by Social Security fails to measure retirees’ costs. They pay more for out-of-pocket healthcare for example. They may have other huge expenses like long-term care, which are mostly not covered by Medicare.

Notes Mary Johnson, an analyst with the Senior Citizen’s League , “One of the biggest issues in using the CPI-W to calculate the Social Security COLA is the fact that it does not track the spending of retired households age 62 and up and gives greater weight to gasoline and transportation costs.”

“Across the board,” Johnson adds, “retired and disabled Social Security recipients spend a bigger portion of their incomes on healthcare costs, housing, and food and less on gasoline. Over the past 12 months, they rank food costs as their fastest growing expenditure, housing, and transportation in that order.”

Why does the government's inflation gauge come up short? “The Consumer Price Index that is used to calculate the COLA is the Consumer Price Index for Urban Wage Earners and Clerical Workers. (CPI-W),” Johnson notes.

“That index is weighted for the spending patterns of younger working adults , but not retired households over the age of 62,” she adds. “The CPI-W, for example, assumes younger working adults spend about 7% of their income on healthcare costs. Researchers have found that older adults 65 and up spend more than twice that amount on healthcare costs. Medicare Part B premiums tend to be the fastest growing cost in retirement (2023 being the exception). But the CPI-W doesn’t account for Medicare Part B premiums, because it does not survey the costs of 65-year-olds.”

Assuming the government won’t change the COLA index anytime soon, what can you do to prepare for inflationary pressures in retirement?

  • If you’re still working and offered a Health Savings Account, fully fund it. The contributions and withdrawals are tax free — if used for a wide variety of medical and related expenses. For this year, The annual limit on HSA contributions is $3,650 for self-only and $7,300 for family coverage. They will likely be higher next year when adjusted for inflation.
  • Consider a long-term care insurance policy. These plans cover expensive stays in nursing homes. You get the lowest premiums when you’re under 50. Buy a policy with an inflation rider.
  • Plan for inflation in your investment portfolio. Some investments perform better in an inflationary cycle than others. Money-market funds, for example, will raise their yields when rates rise. Treasury Inflation-Protected Bonds or TIPs, also can post higher returns when inflation picks up.
  • Plan Ahead, Period. It’s best to work with a fee-only, certified financial planner well before you retire. They can help you stay ahead of out-of-pocket costs that bedevil retirees.

By John F. Wasik, Contributor

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Matthew Etter profile photo

Matthew Etter, CFP®

Partner, President
Signet Financial Management
Daniel DiVizio profile photo

Daniel DiVizio, CFP®, CRC®

Financial Planning Director, Wealth Management
Contact Now