For millions of older Americans, Social Security provides a much-needed financial safety net. Beyond the monthly benefit, retirees also receive an annual cost-of-living adjustment (COLA), designed to help benefits keep pace with rising costs.
But while COLAs sound like a safeguard against inflation, the reality is more troubling: Social Security increases often fail to keep up with actual expenses, leaving seniors with less buying power over time.
The Purpose of COLAs
The idea behind COLAs is simple — as inflation pushes prices higher, benefits are adjusted so retirees can maintain their standard of living. Without COLAs, a $2,000 monthly check today might only feel like $1,000 in 30 years.
The Problem With Social Security COLAs
Unfortunately, Social Security COLAs haven’t lived up to their goal. According to the Senior Citizens League, retirees lost about 20% of their buying power between 2010 and 2024.
The main issue lies in how COLAs are calculated:
They’re based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
This index tracks expenses for working households, not retirees.
Seniors spend more on healthcare, housing, and essentials, which rise faster than the costs measured in CPI-W.
Advocates argue that COLAs should instead be tied to the Consumer Price Index for the Elderly (CPI-E), which better reflects retiree expenses. But so far, lawmakers have not made the switch.
How Retirees Can Protect Themselves From Inflation
Since Social Security COLAs don’t fully protect against rising prices, retirees may need to take additional steps:
Invest in dividend stocks: Companies with a history of steadily raising dividends can provide growing income streams.
Consider growth stocks: Though riskier, they can deliver higher long-term returns. Pairing them with at least two years of cash reserves helps cushion short-term volatility.
Diversify income sources: Savings, investments, and even part-time work can help fill the gap if Social Security falls short.
By building a strong investment strategy, retirees can outpace inflation and avoid relying solely on annual COLAs.
While Social Security COLAs are meant to protect seniors from inflation, history shows they often fall short of covering real costs. Over the years, retirees have lost significant buying power due to the outdated way COLAs are calculated.
That’s why it’s critical to take charge of your own retirement planning, whether through smart investing or diversifying income. With the right strategy, you can stay ahead of inflation and enjoy financial peace of mind in retirement.
