Understanding Social Security and CPI Adjustments
Freddie: Social Security Cost of Living Adjustments COLA are currently based on the CPI-W. It reflects the spending of working age adults switching to the CPI-E, which better captures retiree expenses, could lead to a higher cost of living adjustment. While these changes could strengthen your retirement income, it may also impact the program's long-term sustainability.
Hello again everyone, and welcome to this episode of Leibel on Fire. I'm Freddie Bell and I'm happy to be joined with Leibel Sternbach. He's Amazon's bestselling author of the book entitled, living with Financial Anxiety. I'm happy to be with you Leibel. Welcome back to the show.
Leibel: Hey, how you doing?
Freddie: Unbelievable. Can you explain what the CPI-E is, and how it would change social security benefits compared to the CPI-W
Leibel: Well, let's take a step back even further. Let's just talk about what the CBI is in general.
Okay. And then why there are all these letters after all of 'em, right?
Freddie: Yes.
Leibel: So, CPI is calculated by the Department of Labor Bureau and Statistics and it is one of those metrics that the Federal Reserve and lots of government agencies use. To make decisions based on the consumer price index, which is what CPI stands for, is a measure of how much things cost for people, right?
So when the government wants to say, how much should we allocate for welfare? How much should we allocate for, supplementing government programs or whatever it is, they look at, okay, what's the cost of living for people in different areas? And that's how they'll allocate dollars, right? Make sense?
Yes. So the, in the beginning we only had CPI, and then, you know, what happened was people started saying, well, CPI takes a look at all kinds of things and it has all these kind of volatile numbers in it. Like the price of gas, right? The price of gas changes on a regular basis, right? And when we wanna make kind of like, you know, a baseline adjustment, we don't want to adjust it based on something that'll change from one year to the next, or one season to the next.
We want. More stable numbers. So the Bureau of Labor and Statistics started coming out with new numbers and they started saying, okay, we're gonna exclude volatile things, right? So we're gonna exclude things like food and energy and, you know, other volatile measures or whatever they call volatile. And we'll get more of a baseline number.
Which is all fine and good, but then people started saying, well, what about people who live in cities? People who live in cities, uh, have different costs of living than people who live in you know, rural areas, right? Makes sense, right? Cities are expensive to live in. You got, you know, cost of goods are, you know, probably twice just because you're in the city, gotta pay tolls and all that kind of stuff.
So they came out with CPI. W, which is for urban working people, right? So what does the average white collar worker pay? Right? Or blue collar worker in a city pay for to live off of? Of course. It excludes so-called volatile things like the cost of food and energy and you know, all the things we need to live off of.
So right now, right, you've got social security, which gets a adjusted for inflation every year, which is a good thing, right? We wanted to increase and, you know, make it so that you know what you paid for last year you can keep paying for, we don't want people to suddenly, you know, go broke who are on social Security.
Unfortunately though. It doesn't tend to keep pace with inflation because the things that, people actually need to live off of aren't properly reflected in there. And so the last few years some years it has been more than what inflation was, and some years it's been significantly less.
And historically, social security has not kept up with inflation because it excluded all the things that actually cause inflation. Like energy. Healthcare is another one of those things that isn't properly reflected. 'cause inflation for healthcare is not included in those numbers. And healthcare has had double digit inflation numbers for like the last 25 years.
So not even close to being included in that number anyways, the difference between C-P-I-W-C-P-I-E or whatever it is, is basically it's the government monkeying around with what cost of a living adjustment is based on to. If they tell you it's a good thing for you, it's probably not a good thing for you.
It's probably a way for them to reduce the amount that they're paying out and do it in a way while they're telling you that in theory, you're going to get more money.
Freddie: It seems like you're subtracting the things that matter at the most to most people in retirement.
Leibel: That is exactly right. That is generally what it is, and no matter how you cut it.
No matter how you cut in, none of the CPI numbers are a proper reflection of what retirees are paying because retirees, the inflation experience by retirees is very different than the inflation experience by everyone else. And as far as I know, the Bureau Labor and statistics doesn't actually calculate a number specific for retirees of what they experience, right?
Because medical costs is a big one for retirees. You have. Food is a big one. Energy is a big one. They're home all day working. People are not home all day, right? Like the whole daylight savings time is based on the fact that people would go to one office and it would save energy by, making people be, uh, out of the house for, daylight hours.
But that. Goes out the window for retirees, right? Probably goes out of the window for the state of Florida too. So
Freddie: it does. We're talking about, uh, CPI. So is there really a one that's more fair than the other? In all actuality Leibel?
Leibel: In all actuality. Not in my opinion. I, uh, they're, you know, again, when people propose things like CPI-E or, um, CPIW is supposed to be a more fair reflection.
I think it was CPIM before. It's all supposed to be a more fair number for retirees. But I am. Always, you know, when the government proposes changes to social security, I'm always a skeptic. And what's interesting is, is you'll have people who propose good changes to social security and they never get enacted.
And then you have the people who are very loud and get. Things pass for social security and they are never good for retirees. So, um, if it's, at the end of the day, if it's something good, it's almost not worth reading about because it's not gonna happen or it's not gonna happen in a way that, uh, that impacts enough people to make a difference.
Freddie: So talk about the benefit increases to be 20 to 30 year retirement. Is there a big impact in that, uh, span of time that we're talking about?
Leibel: So interestingly enough, no. Because the, again, government, being government, they use a different number for adjusting wages for inflation, and the Social Security Administration has their own way of figuring that one out.
And it's not tied to, it's not directly tied to CPI, it's based on wage indexes. And so they look at what the average wage increases and then they'll index your older wages so that it increases by that. But that's a completely different number. I don't think it a, I don't think it'll have a direct impact if it does.
Having said that, again, I think anyone who's 20 or 30 years out from Social Security has, uh, has already concluded that social security is not gonna be there for them. Mm-hmm. So, um, I, I don't think, any of us in that ta in that age bracket, are counting on you know, any of these numbers and, and let's face it, right, they're already, they're talking about increasing social security filing ages, retirement ages already.
They're talking about making 70 the new earliest retirement. Like who knows what it's gonna be by time, you know, people of my age bracket, uh, actually retire.
Freddie: Interesting. So there, I know there's been a lot of talk about the consumer price index E uh, where does that stand right now? Do you think it really has a chance of being adopted?
Leibel: Do I think it has a chance of adopted, uh, unlikely, but possibly it, it depends on when the, so I think what it really comes down to is that there's two people who can influence that, or two agencies that can influence that. I think the social security trustees can influence that. If they create a report and they say that this will help solve the social security, uh, solvency problem, and they say that by switching to this, it's gonna.
Impact their adjustments for inflation in a positive way positive for them, not positive for you that it might get adopted. I think the other people who can probably make that happen as well in terms of adoption of these metrics, it probably. The trustees, or it's gonna be the Department of Treasury, right?
The Social Security Administration. Indirectly the Social Security Administration. Because if they say again, it is gonna change how much they actually have to pay out, that's gonna balance the budget, right? It's gonna, right now social Security is paying out more than it takes in. Social security is is a Ponzi scheme, and it's based on that.
You need to have more people working than paying out. Like any good pausing scheme and you have new, more people paying in and new investors than you are paying out to old investors. And right now we're kind of flipping that script because we have more retirees than we have people who are working. We also have a population crisis.
We have a problem that we don't have enough people of working age paying into the system, and we don't have enough babies being born to fund this future problem. And. Those are fundamental problems, right? Like, so changing CBIW to CBIE or whatever, that'll help push that problem down the road maybe by a few years.
But it's not fundamentally, it's not gonna solve the problem that social security is set up as a Ponzi scheme, and they cannot properly invest their money to overcome that. So, structural problems with the, with the program.
Freddie: Is there anything at yields4u.com on CPI-E or W?
Leibel: Um, we don't have anything specifically about that, but what I, again, I'm gonna point you to our retirement tax SWOT analysis, right?
That is where we take a look at those things and how they impact you. I think again, right, these are. Fundamental core issues that you need to, that we need to worry about and we need to worry about. How does inflation impact your long-term, your long-term ability to retire and stay retired?
I think social security will always be able to pay out its bills because it needs to, at least for the next. 30 years because it, and, and I should say for existing beneficiaries, right? If you're retiring in the next five years, I think you're fine. I think you're, if you're retiring more than five years out you're at risk of not being able to get the amount of money that you expect from social Security.
And those are things that need to be modeled for you. And even if you're an existing beneficiary or you're going soon going to be a beneficiary, we need to make sure that in 10 or 15 years from now that you are able to supplement social security and that you are retirement savings can keep up because there is a very, there is a very good chance that social security when not keep, will not keep pace for inflation.
As well as that your savings won't keep pace with inflation, right? And so you need to make sure that you kind of overkill on the growth to be. To be able to combat. That
Freddie: makes a lot of sense. We gotta leave it right there. But as you've heard, switching Social Security Cost of Living adjustments to CPI-E could lead to higher benefits by better reflecting retiree spending, especially on healthcare and on housing.
While this shift could boost retirement security, it could also add to pressure to the program's long-term funding. As Leibel just mentioned, the idea remains under active debate with no final decision yet made.
