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How Cost-of-Living Index Changes Can Impact Your Retirement - Part 2


A decrease in the COLA index will result in a substantial drop in Social Security benefits.

A few weeks ago I wrote a fairly popular article that discussed the rising possibility that the federal government will change the cost of living adjustment (COLA) index that Social Security payments are tied to. I wanted to follow up with more information on just how large of an impact this change can have.

Here is a summary of the issue from my previous article:

Currently Social Security payments increase with the rate of the Cost Of Living Adjustment (COLA) index. The COLA index used for Social Security is equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W) for a specific period. This index represents a basket of goods that only changes periodically. However, there is discussion about changing the index used to the "chain-weighted" Consumer Price Index (CPI), which supposedly accounts for substitutions consumers make when prices of certain goods rise.

There are many flaws in the chain-weighted CPI methodology and some believe it is just one more way the government has understated true inflation and pushed more people into higher tax brackets. But the purpose of this article is not to dive into that debate. I want to show how a reduction in the COLA used will impact a person's retirement situation.

In my previous article I discussed how changes to the COLA index can impact when a person runs out of retirement. Today I want to analyze how this change can impact a person's annual Social Security payments as well as the lifetime benefits people can expect to accrue.

It is generally believed that the chain-weighted CPI runs about 0.25% below today's COLA index. I want to show, using our Retirement Planner, what type of impact this will have on a couple's retirement plan over the years. Let's start with some assumptions:

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