When you ask retirees to name their biggest fears, running out of money is generally one of them. But part of the reason retirees worry about depleting their savings is that costs tend to rise from year to year. While inflation isn’t a new concept by any means, since 2021, it’s been rampant. And while recent levels are unusual, historically speaking, there’s no guarantee that you won’t encounter a period of soaring inflation at some point during your retirement. The good news is that Social Security benefits are designed to keep up with inflation — at least in theory. Whether they do so in practice is a different story.
How Social Security COLAs work
Each year, Social Security benefits are eligible for an automatic cost-of-living adjustment, or COLAs. But that doesn’t mean benefits actually rise every year. Social Security COLAs are tied directly to inflation, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If that index increases, Social Security benefits go up. If it decreases, benefits stay flat. Thankfully, they can’t decrease from one year to the next.
Social Security COLAs are specifically based on third quarter CPI-W data. For this reason, the Social Security Administration typically announces COLAs in October that take effect the following January.
Why Social Security’s COLA formula may be flawed
Social Security’s COLA formula should work in theory. The reason it doesn’t work well in practice is simple — the CPI-W does not accurately capture the costs Social Security recipients tend to face. The CPI-W tracks the costs of wage earners and clerical workers. Many Social Security recipients, by nature, aren’t workers and therefore spend differently.
Social Security beneficiaries tend to spend a larger share of their money on healthcare and housing. The CPI-W tends to understate the impact of healthcare inflation in particular, since healthcare tends to comprise less of workers’ income than seniors’. To get a sense of how well (or not) Social Security COLAs hold up, let’s review a couple of key data points:
- The nonpartisan Senior Citizens League found that Social Security recipients lost 20% of their buying power between 2010 and 2024 due to ineffective COLAs.
- Plan Advisor, drawing on data from HealthView Services, found that retirees today can expect healthcare costs to rise 5.8% on average each year during retirement, compared to projected Social Security COLAs of 2.4%.
If you’re skeptical about that second point, just look at Medicare premiums today. Last year, the standard monthly Part B premium was $185. This year, it’s $202.90. That’s a roughly 9.7% increase in a single year. Compare that to this year’s 2.8% Social Security COLA, and it’s easy to see why those increases commonly fall short.
Related: Will You Owe Taxes on Social Security? Here’s How to Tell
How to beat inflation in retirement
While Social Security offers some inflation protection, it doesn’t fully do the job. But you can do your part to beat inflation by:
- Investing in growth and income-producing assets like dividend stocks and ETFs
- Loading up on inflation-sensitive assets like Treasury Inflation-Protected Securities (TIPS)
- Buying an indexed annuity (though be mindful of drawbacks like complex structures, high surrender charges, and potentially costly fees)
- Delaying Social Security until age 70 for larger checks, which can better help cover rising costs later in life
While Social Security benefits are designed to keep up with inflation, a flawed system tends to leave retirees with less buying power over time instead of the same amount or more. But if you take steps to beat inflation outside of Social Security, you may find that between COLAs and your personal efforts, you’re in a strong position to keep up with your expenses as they rise.
Related: 4 Social Security misconceptions to clear up