The great COLA debate-maybe not the expected solution.

“Everyone” knows that Social Security was never intended as the sole source of retirement income or even the majority of income – but apparently not everyone knows it if you believe the rhetoric. 

Many people claim that the COLA in inadequate, even unfair, some rage that what they receive from Social Security is not what they were promised or what they paid for. 

Truth is that it is what was promised and we did not pay for our benefits, we paid a tax to fund a pool of money, a notational government trust fund. If people had paid for their benefits, the incoming tax revenue would be sufficient to sustain full accrued benefits – it isn’t as we know. 

To correct the perceived COLA shortfall based on use of the CPI-W, many people suggest using the (experimental) CPI-E which better reflects spending by those over age 62. I read that the CPI-E may be higher, but can also be lower.  I did some research and ran some numbers. Here are the estimates.

CPI-E is designed around households age 62+ and historically rises about 0.2 percentage points faster per year on average. 

If Social Security COLAs had used CPI-E instead of CPI-W since 2010:

• $1,000 monthly benefit indexed by CPI-W → about $1,475
• Same benefit indexed by CPI-E → about $1,520

So over time, CPI-E compounds into a modest difference. In the estimate that is $45 per month after sixteen years. Using today’s average FRA benefit the dollars would all be higher.  No doubt it helps, but not a significant change, especially when Medicare premium increases will likely continue to outpace inflation in the future. 

Changing the COLA calculation accelerates the trust depletion as well. Using CPI-E increases the funding gap by 12% according the Committee for a Responsible Federal Budget Social Security Reform estimator. 

There is a clear lesson for anyone who hopes to retire one day. Live your life, use your money, in a way that enables you to create a reasonable (to your lifestyle) income to supplement Social Security. Sounds simple, but for many people it isn’t, not because of income, but priorities and financial discipline.