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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, as well as two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays).
Welcome to the Confluence Investment Management Asset Allocation Bi-Weekly report for 11/17/2025. I'm Phil Adler. Social Security has been, over the years, a slowly expanding support prop for The US economy. Confluence Chief Market Strategist Patrick Fearon Hernandez joins us today to discuss the impact of the Social Security cost of living adjustment for 2026. Patrick, many people may not realize just how powerful Social Security is as a foundation for our economy.
Phil Adler:What do the numbers tell us?
Patrick Fearon-Hernandez:Well, hi, Phil. Thanks for having me on the program. And to answer your question, Social Security really is more than just a retirement check. It's a major economic stabilizer. On average, Social Security benefits account for about 30% of retired people's income and more than 5% of all personal income in The US.
Patrick Fearon-Hernandez:In fact, in 2024, Social Security retirement and disability benefits were equal to 4.9% of the nation's gross domestic product. That's a significant slice of economic activity.
Phil Adler:Does Social Security provide more fuel for the economy than it did, say, ten or twenty years ago?
Patrick Fearon-Hernandez:Yes. It does. The impact has grown over time largely because of demographic shifts. Importantly, the baby boomer generation is retiring in large numbers and more people are receiving disability benefits. As a result, Social Security income has become a bigger part of the economy.
Patrick Fearon-Hernandez:And because benefits are adjusted for inflation, they help maintain consumer demand even during periods of rising prices.
Phil Adler:So I would assume Social Security's impact will keep growing simply because we are an aging nation with with a growing number of disabilities?
Patrick Fearon-Hernandez:That's a key point. Yes. As the population ages and the number of beneficiaries increases, Social Security's role in supporting demand will likely continue to grow. It's a built in stabilizer, especially important in times of economic uncertainty or inflation.
Phil Adler:Well, this year's cost of living increase is 2.8%. That number is supposed to mimic how costs have risen over the past twelve months. Many people complain it does not reflect real cost increases. Are the complainers right?
Patrick Fearon-Hernandez:Well, they do have a point, Phil. The COLA is based on a specific version of the consumer price index. And while it's designed to reflect average price changes, it may not capture the actual experience of every individual, especially retirees who spend more than average on health care and housing. So, yes, for some, the COLA may feel inadequate. Of course, the flip side of that is that for some seniors whose basket of expenses is different, the COLA probably overcompensates for inflation.
Phil Adler:Well, has the government ever tried to figure out a different and possibly better way of determining cost inflation?
Patrick Fearon-Hernandez:Well, there have been discussions about using alternative indexes like the CPI e, which is tailored to elderly spending patterns. But so far, the standard CPI w remains the basis for COLA calculations. It's widely available and consistent even if it's not perfect.
Phil Adler:Patrick, how does the average rise in Social Security benefits compare with increases in the consumer price index?
Patrick Fearon-Hernandez:Over the last two decades, the average Social Security retirement benefit has grown at an annual rate of 3.8%, while the CPI has increased at an average rate of just 2.6%. So benefits have actually outpaced inflation. Now the reason is that people's initial retirement benefit is based largely on their salary history, and as worker productivity and wages rise over time, initial retirement benefits increase over time as well. So the average Social Security retirement benefit reflects both the increase in average productivity and wages over time and the impact of the COLA on continuing benefits.
Phil Adler:Then is it reasonable to say that newly retired, higher income Social Security beneficiaries have an advantage?
Patrick Fearon-Hernandez:Yes. They do. Higher lifetime earnings translate into higher initial benefits, which are then adjusted annually. So those with higher incomes during their working years generally receive a more generous benefit in retirement, and the value of the COLA then
Phil Adler:Medicare costs automatically deducted from Social Security payments will grow again this year. How much does this subtract from the benefits?
Patrick Fearon-Hernandez:While the exact amount varies by individual, rising Medicare premiums can offset a portion of the COLA increase. For many retirees, this means their net benefit, the amount they actually receive, may grow more slowly than the headline COLA suggests.
Phil Adler:How much of a boost does the economy get from Social Security cost of living benefits in January when the payments begin arriving?
Patrick Fearon-Hernandez:Well, the boost is meaningful. With benefits increasing by 2.8%, the average recipient will see about a $56 increase in their monthly benefit. Multiply that across millions of beneficiaries, and you get a sizable injection of spending power into the economy, especially in sectors like retail, health care, and services.
Phil Adler:And do the benefits contribute at all to inflation going forward?
Patrick Fearon-Hernandez:They can to a degree. By maintaining or increasing purchasing power, COLA adjustments help sustain demand. That can keep inflation somewhat higher than it otherwise would be, but it's a trade off. Without COLAs, demand would drop, potentially leading to deflationary pressures.
Phil Adler:Well, another year has passed, and we still see no movement to assure that Social Security benefits will escape reductions as the trust fund that supports the system diminishes. What are the latest projections?
Patrick Fearon-Hernandez:Well, the latest projections still suggest that the trust fund will be depleted in the early to mid twenty thirties. After that, benefits might be reduced to reflect what Social Security taxes bring in unless congress acts. However, keep in mind that there's strong political pressure to maintain benefits. Various proposals exist to shore up the system, and we think those proposals could still be put into place.
Phil Adler:So beneficiaries really don't need to worry given the overwhelming popularity of the Social Security system?
Patrick Fearon-Hernandez:Well, it is a valid concern, but the popularity of Social Security makes major cuts politically difficult. Most likely, we think we'll see adjustments perhaps in taxes or benefit formulas or both in order to preserve the system. For beneficiaries, we think panic probably isn't warranted, but you do wanna keep yourself informed about how things transpire.
Phil Adler:Thank you, Patrick. The title of this week's report is the inflation adjustment for Social Security benefits in 2026, and you can find a link to the written report on Confluence webpage, confluenceinvestment.com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. Also, this information does not constitute a solicitation or an offer to buy or sell any security.
Phil Adler:Our audio engineer is Dane Stole. I'm Phil Antler.