If you ask Social Security recipients if they feel that their payments have kept up with inflation, there probably won’t be many who say yes. But at the Cato Institute, Romina Boccia suggests that cost-of-living adjustments are too generous and that changing the way they are measured would save Social Security billions of dollars. She writes:
The Social Security Administration just announced a 3.6 percent cost-of-living adjustment (COLA) for benefits paid beginning in January 2027. The adjustment reflects the increase in average prices from the third calendar quarter of 2025 to the third quarter of 2026. It will add an estimated $56 billion to Social Security spending in calendar year 2027 compared with leaving benefits unadjusted, according to the Cato Social Security model.
Protecting beneficiaries from inflation is reasonable. But Social Security’s COLA relies on an index with limited population coverage that does not fully account for how consumers respond to changes in relative prices. That means taxpayers are financing benefit increases that exceed those under a more accurate measure of inflation, such as the chained CPI.
Savings from Adopting a More Accurate COLA
Cato’s modeling estimates that adopting a chained CPI for Social Security COLAs beginning in 2027 would reduce spending by $2 billion in 2027 relative to current law and by $188 billion over 2027–2036. It would close 11.5 percent of the program’s 2032 cash-flow shortfall and 12 percent of its 75-year actuarial shortfall.
The savings accumulate because each annual adjustment affects the benefit base for subsequent years. As such, a small difference in the COLA produces meaningful savings over time. Benefits would generally continue to rise to keep pace with inflation, but more slowly than under the current law.
Action Line: No matter how inflation is measured, in retirement you must plan for its effects. When you want to talk about inflation and your retirement portfolio, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
