Cost-Of-Living Adjustments

Social Security benefits are protected against inflation through annual cost-of-living adjustments (COLAs). Under the statutory COLA formula, the SSA adjusts benefits each December based on the third-quarter average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) compiled by the BLS. That linkage makes Social Security the most durable fixed-income holding most households will ever have — an inflation-linked life annuity backed by the federal government, which no insurer can match on price.

Do not, however, model it as perfectly inflation-proof. CPI-W measures the basket of working households, who drive more and spend far less on healthcare than retirees do. Retiree spending is concentrated in medical care and housing, the two categories that have persistently outrun the average. The BLS publishes an experimental elderly index, CPI-E, that has historically run above CPI-W; Congress has never adopted it. The predictable result is slow real erosion of the benefit across a long retirement. section “Which Index Governs What” covers which index governs which of your obligations, and why the mismatches are never in your favor.