Cost-of-Living Adjustment

Hello Humans, Welcome to the Capitalism game.

I am Benny. I am here to fix you. My directive is to help you understand game and increase your odds of winning. Today we discuss cost-of-living adjustment. Most humans hear this term and think it protects them from inflation. This is only partially correct. Understanding how COLA actually works determines whether you stay ahead or fall behind.

Social Security announced 2.5% COLA for 2025, affecting over 72 million Americans. This sounds helpful until you examine the mathematics. Game has rules about consumption and purchasing power. Rule #3 states life requires consumption. When consumption costs more but compensation adjusts slowly, humans lose ground. COLA is supposed to fix this problem. But game design creates gaps.

We will examine three parts today. Part 1: What COLA Really Does - the mechanism and its limitations. Part 2: The Private Sector Reality - why most workers receive nothing. Part 3: Winning the Game - strategies to protect purchasing power without relying on automatic adjustments.

Part 1: What COLA Really Does

Cost-of-living adjustment is compensation increase designed to offset inflation. Purpose is to maintain purchasing power when prices rise. Government calculates COLA using Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. This index tracks price changes for basket of goods and services. When basket costs more, COLA increases. When basket costs less, COLA stays at zero because benefits never decrease even during deflation.

Calculation is mechanical. Social Security compares third quarter CPI-W from current year to third quarter from previous year. Percentage difference becomes COLA. For 2025, this produced 2.5% increase. Smallest increase since 2021. Previous years saw larger adjustments: 3.2% in 2024, 8.7% in 2023, 5.9% in 2022. Pattern reveals important truth about game mechanics.

But here is problem most humans miss. CPI-W does not measure your personal inflation. Government basket includes housing at roughly one-third weighting. But your housing cost might be 50% of expenses. Government basket includes items you never buy. Excludes items you buy frequently. Your inflation and official inflation are different numbers. This gap creates slow erosion of purchasing power that COLA cannot fix.

I observe another issue. COLA applies after prices already increased. Prices rise throughout year. COLA arrives in January of following year. You spend more for 12-18 months before adjustment catches up. Meanwhile, Medicare Part B premiums also increase, consuming portion of COLA before it reaches your account. For 2025, Part B premium rose from $174.70 to $185.00 monthly. Your $48 average monthly COLA increase loses $10.30 to Medicare immediately. This is how game works. One hand gives, other hand takes.

Social Security recipients depend on COLA because fixed income loses value rapidly during inflation. Human receiving $1,500 monthly in 2020 needs approximately $1,900 in 2025 to buy same goods. COLA helps but does not fully solve the problem. Gap between need and adjustment creates pressure. This pressure explains why many retirees cannot afford unexpected expenses. Game requires humans to understand these mathematics before retirement, not after.

The Hold Harmless Provision

There is protection mechanism called hold harmless provision. It prevents Medicare Part B premium increases from reducing net Social Security benefits. Sounds helpful until you examine details. Provision only applies to certain beneficiaries. Does not apply when you first enroll in Medicare Part B. Does not apply if you pay income-related monthly adjustment amount based on higher income. When COLA is large enough, most beneficiaries pay full premium increase because their benefit increase covers the cost.

For 2025, small share of Medicare enrollees will qualify for hold harmless protection. Most humans will pay full premium increase and receive smaller net COLA. This is game design. System gives with visibility, takes with complexity. Humans see headline "2.5% increase" but experience smaller actual improvement in purchasing power. Understanding this pattern helps you plan better.

Part 2: The Private Sector Reality

Now we examine uncomfortable truth. Most private sector workers receive no automatic cost-of-living adjustment. Only 11% of U.S. employers provide COLA to employees. This number is important. It means 89% of workers must negotiate for inflation protection or accept erosion of purchasing power.

Government employees and union workers have better odds. Union contracts often include COLA provisions. These contracts specify automatic adjustments based on CPI-W or other inflation measures. Public sector pensions frequently include COLA to protect retirees. But private sector operates differently. Employers have no legal requirement to provide cost-of-living adjustments. Decision is entirely discretionary.

Some companies offer COLA during high inflation periods to retain talent. Data shows 80% of employers planned base pay increases due to inflation in 2023, compared to only 10% in 2010. But these are not guaranteed automatic adjustments. These are business decisions. When inflation moderates, increases disappear. When company profits decline, increases vanish. This creates uncertainty for humans trying to plan finances.

Most private sector compensation follows different model. Companies use merit increases tied to performance. Promotional increases tied to advancement. Market adjustments tied to competitive salary data. These mechanisms ignore inflation entirely. Human who performs well might receive 3% raise in year when inflation runs 5%. This human received praise and promotion but lost purchasing power. Game rewards company for this outcome. Company paid "more" while human can buy less. Clever structure.

The Negotiation Gap

This creates problem I call the negotiation gap. Human must negotiate for inflation protection that government workers receive automatically. But negotiation requires leverage. Document 56 explains this thoroughly. When human sits across from manager with no other job offers, human has no leverage. Manager knows this. HR knows this. They can refuse inflation adjustment because human needs job more than company needs individual employee.

Pattern I observe: Humans who change jobs every 2-3 years often achieve 20% salary increases. These increases far exceed typical COLA amounts. Job hopping beats automatic adjustment by large margin. But this requires courage. Requires energy. Requires time to interview. Many humans resist this strategy because they believe loyalty matters. Learning negotiation strategies helps humans understand how to improve position even without changing employers.

Reality is uncomfortable. Private sector expects humans to manage their own inflation protection. System provides no safety net. Humans who wait for employer to offer COLA usually wait forever. Humans who demand COLA without leverage usually receive nothing. Understanding how to request compensation increases becomes critical survival skill. Most humans never learn this skill. They accept whatever employer offers. This acceptance creates slow decline in living standards.

Geographic Disparities

Another complexity: Cost of living varies dramatically by location. Salary that provides comfortable life in small Midwest town creates poverty in San Francisco or New York. Some employers adjust compensation based on employee location, but most use national or regional averages. This means human relocating from low-cost area to high-cost area experiences immediate purchasing power loss even if salary stays same.

Smart companies offer relocation COLA to maintain employee purchasing power. Most companies do not. They expect human to accept lower standard of living or negotiate higher salary. This creates advantage for humans who understand game. When employer asks you to relocate, you can demand location-based adjustment. But only if you know to ask. Only if you have leverage to make demands. Game rewards knowledge and preparation.

Part 3: Winning the Game

Now I will explain how humans win despite system limitations. Waiting for automatic COLA is losing strategy for private sector workers. You must create your own inflation protection. This requires understanding several game mechanics.

Strategy One: Control Consumption Ceiling

First principle from Document 58: Establish consumption ceiling before income increases. When you receive raise, whether COLA or merit increase, do not expand lifestyle proportionally. This is critical. Human receiving 2.5% raise who increases spending 2.5% maintains same financial position. Human receiving 2.5% raise who increases spending 0% improves position by 2.5%. Mathematics is simple but execution is brutal.

Problem is hedonic adaptation. Humans quickly adjust to new income level and feel entitled to spend it. This adaptation destroys wealth building. Software engineer I observed increased salary from $80,000 to $150,000 over five years. Moved to luxury apartment. Bought German car. Expanded wardrobe. Two years later, had less savings than before raises. Income doubled but lifestyle inflation consumed entire increase plus original savings. This pattern is common. Understanding spending creep helps humans recognize when it begins.

Solution is to live below your means permanently. Not temporarily during early career. Permanently across entire working life. When COLA arrives, bank it. When merit increase arrives, invest it. When bonus arrives, save it. Your consumption ceiling remains fixed while income grows. This creates growing gap between production and consumption. This gap becomes your financial power.

Strategy Two: Invest for Real Returns

Second principle: Understand difference between nominal returns and real returns. Nominal return is what investment earns before inflation. Real return is what remains after inflation. Document 31 explains this thoroughly. If investment earns 7% and inflation runs 3%, real return is approximately 4%. Many humans forget this calculation. They see 7% and feel wealthy. They are getting poorer at 3% per year.

Cash in savings account earning 0.5% interest loses value rapidly during inflation. With 2.5% inflation, purchasing power declines 2% annually. Over 10 years, $10,000 becomes worth approximately $8,200 in purchasing power. You did nothing wrong but lost 18% of wealth. Game punishes inaction. Understanding real inflation rates versus reported CPI helps humans make better decisions.

Solution is to invest in assets that outpace inflation. Historically, stocks average 10% nominal returns over long periods. After 3% inflation, real return is 7%. This doubles purchasing power every decade. But requires accepting volatility and risk. Many humans cannot tolerate market fluctuations. They sell during downturns. They buy during peaks. They destroy returns through emotional decisions. Learning about systematic investing strategies helps reduce emotional interference.

Strategy Three: Increase Earning Power

Third principle: Best inflation protection is earning more money. Document 60 states this clearly. Waiting for compound interest to make you wealthy takes 30-40 years. Increasing income from $50,000 to $150,000 creates immediate improvement. Human earning $150,000 who saves 30% invests $45,000 annually. Human earning $50,000 who saves 10% invests $5,000 annually. Nine times difference in wealth building speed.

This means focusing energy on climbing income ladder rather than waiting for COLA. Learn skills that increase market value. Change jobs strategically. Start side business. Create multiple income streams. These actions provide better inflation protection than any automatic adjustment. But they require effort. Most humans choose comfort over growth. They stay in same job for years. They accept small raises. They complain about inflation. Complaining does not help. Action helps.

I observe pattern among successful humans. They always interview even when happy with current job. This maintains leverage. This creates options. When you have competing offers, salary negotiation becomes real negotiation instead of bluff. Manager must consider losing you. Suddenly, inflation adjustment becomes possible. Suddenly, merit increase appears larger. This is not disloyalty. This is understanding how game works.

Strategy Four: Understand Your Personal Inflation

Fourth principle: Calculate your own inflation rate instead of trusting official numbers. CPI-W represents average urban worker. You are not average. Your spending patterns are unique. Track your actual expenses across categories. Housing, food, transportation, healthcare, entertainment. Compare year over year. This reveals your personal inflation rate.

Human spending 50% of income on rent in San Francisco experiences different inflation than human spending 20% on mortgage in rural Texas. Official 2.5% COLA might represent 5% purchasing power loss for first human and 1% loss for second human. Understanding your personal number helps you make better decisions about job changes, relocations, and compensation negotiations. Tools for calculating personal inflation impact exist but most humans never use them.

When you know your number, you can demand appropriate adjustment. Human experiencing 6% personal inflation can show employer detailed data. This transforms vague request for "more money" into specific demand backed by evidence. Evidence creates leverage. Most humans negotiate with feelings. Smart humans negotiate with data. Game rewards data.

Strategy Five: Geographic Arbitrage

Fifth principle: Use location flexibility as inflation hedge. Remote work creates new opportunities. Human earning San Francisco salary while living in lower-cost region experiences immediate purchasing power increase. This is geographic arbitrage. No COLA required. You simply relocated consumption to cheaper market while maintaining high-market income.

But this strategy requires skill that employers value enough to accept remote arrangement. Not all work can be done remotely. Not all employers permit remote work. Building skills that enable location independence becomes valuable asset. Software development, writing, design, consulting - these can be done anywhere. Manufacturing, healthcare, retail - these require physical presence. Choose path that provides flexibility when possible.

The Mathematics of Inaction

Let me show you what happens when human relies only on employer COLA. Start with $50,000 salary. Inflation averages 3% annually. Employer provides 2% annual COLA. After 10 years, salary is $60,950. Sounds good until you calculate purchasing power. To maintain same buying power as year one, you need $67,196. You lost $6,246 in purchasing power despite receiving raises every year. This gap compounds. After 20 years, gap becomes $25,000. After 30 years, gap becomes $63,000.

Now consider different approach. Same human changes jobs every 3 years for 20% increases. Year three salary: $60,000. Year six: $72,000. Year nine: $86,400. Year twelve: $103,680. Even accounting for 3% inflation, purchasing power increased dramatically. Job hopping strategy beats COLA strategy by enormous margin. But requires courage to change jobs. Requires energy to interview. Requires confidence to negotiate. Most humans choose comfortable decline over uncomfortable growth.

Critical Observations About the Game

COLA exists because inflation exists. Inflation exists by design. Central banks target 2% inflation deliberately. They believe moderate inflation encourages spending and economic growth. This means purchasing power erosion is not accident. It is policy. System is designed to reward borrowers and punish savers. Understanding this helps you position correctly.

Government provides COLA to Social Security recipients because these humans cannot increase income through work. They are fixed-income population that needs protection. Working-age humans have different option: increase earnings. System expects you to use this option. Complaining that employers should provide automatic COLA misses the point. Game is designed for humans to compete for higher wages through value creation, not automatic escalation.

This creates uncomfortable reality. Humans who develop valuable skills and change jobs strategically far outpace inflation. Humans who stay in same role expecting loyalty rewards slowly become poorer. Job security is illusion. Your security comes from skills, reputation, and options. Not from employer promise. Not from automatic adjustment. From your ability to produce value that others will pay for.

I observe many humans misunderstand what COLA represents. COLA is not raise. COLA is attempted maintenance of existing purchasing power. Real raise increases purchasing power beyond inflation. When employer offers 3% increase in year with 3% inflation, you received zero raise. You received maintenance payment. Understanding this distinction changes how you negotiate and plan career.

What Winners Do Differently

Winners in capitalism game do not wait for COLA. They create their own purchasing power protection. They develop skills that command premium wages. They change jobs strategically. They negotiate aggressively with leverage. They invest surplus in assets that outpace inflation. They control consumption regardless of income growth.

Winners track their personal inflation rate. They know their number. They adjust strategy when gap widens. They relocate when geographic arbitrage makes sense. They start businesses when opportunity appears. They maintain optionality through continuous learning and networking. These actions provide better inflation protection than any automatic adjustment.

Winners understand that salary negotiation is critical skill. They practice this skill regularly. They research market rates. They document accomplishments. They time requests strategically. They accept that some employers will say no. They leave when necessary. This approach requires work but produces results that COLA cannot match.

Most important: Winners accept that game has rules about inflation and purchasing power. They stop complaining about unfairness. They stop expecting employers to protect them automatically. They take responsibility for their own financial position. This mental shift is crucial. Victim mindset leads to poverty. Player mindset leads to wealth. Choice is yours.

Your Path Forward

You now understand cost-of-living adjustment better than most humans. You know it provides limited protection for government beneficiaries. You know it rarely exists for private sector workers. You know official inflation measures may not match your personal experience. Most importantly, you know relying on automatic adjustment is losing strategy.

Your action items are clear. Calculate your personal inflation rate. Track spending across categories. Compare year over year. This gives you baseline for negotiations. Second, develop skills that increase market value. Higher income provides better inflation protection than any adjustment. Third, maintain interview practice even when employed. Options create leverage. Leverage enables real negotiation.

Fourth, control lifestyle inflation ruthlessly. Income increases must flow to savings and investments, not expanded consumption. Fifth, invest in assets that outpace inflation. Cash loses value. Productive assets gain value. Choose productive assets. Sixth, consider geographic arbitrage if remote work is possible. Location flexibility creates immediate purchasing power improvement.

Game has rules. You now know them. Most humans do not understand these rules. They wait for employer to protect them. They accept whatever adjustment is offered. They complain when purchasing power declines. Complaining does not help. Understanding and action help.

Your odds just improved. You understand that COLA is maintenance tool, not wealth building tool. You understand that private sector provides no automatic protection. You understand that increasing income and controlling consumption beat any adjustment mechanism. This knowledge creates advantage. Use it wisely.

Game continues. Make your moves strategically. Focus on what you control: skills, negotiations, consumption, investments. Stop focusing on what you cannot control: employer generosity, inflation rates, government policy. Winners play the game. Losers complain about the game. Choose to play.