Key Points
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Social Security benefits are eligible for an automatic cost-of-living adjustment (COLA) each year.
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The program’s COLAs have a history of failing to keep up with inflation.
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Rather than rely on COLAs, invest your savings strategically.
There are many older Americans today who are grateful for Social Security — and for good reason. Not only do those benefits serve as a financial lifeline for many seniors, but they’re also eligible for an annual cost-of-living adjustment, or COLA.
The purpose of Social Security COLAs is to help ensure that seniors are able to maintain their buying power as inflation drives living costs upward.
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Think about it this way. Some people collect Social Security for 30 years or more. If you start out with a $2,000 monthly benefit today and it never increases, in 30 years from now, it might only give you $1,000 worth of buying power. Social Security COLAs are supposed to make it so that as costs rise, benefits are able to keep up.
The sad reality, though, is that Social Security COLAs do a poor job of keeping up with inflation. So if that’s something you’re eager to do in retirement, you should know that there’s a better way.
The flaw in Social Security COLAs
Social Security COLAs should help seniors maintain their buying power from year to year. But data shows that they don’t.
The Senior Citizens League, an advocacy group, reported that between 2010 and 2024, Social Security benefits lost an astounding 20% of their buying power. And part of that boils down to a problem with the way they’re calculated.
Social Security’s COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But the costs measured by that index aren’t necessarily representative of the costs retirees face.
Retirees, by nature, aren’t workers, and many don’t reside in urban areas. For this reason, advocates have pushed to base Social Security COLAs on the CPI-E, or Consumer Price Index for the Elderly. But lawmakers do not seem to be in a hurry to make that change.
How to tackle inflation in retirement
Since Social Security COLAs have long failed to adequately keep pace with inflation, if you want to maintain your buying power in retirement, you may have to take matters into your own hands. And that means putting your money into assets that can generate strong enough returns to match or, more ideally, outpace inflation.
One option you may want to look at is dividend stocks. Specifically, it’s a good idea to focus on companies that have consistently increased their dividend from year to year over time.
It’s also a good idea to invest a portion of your savings in growth stocks. Though growth stocks tend to be more volatile than dividend stocks, if you maintain a large enough cash position in your portfolio to cover your near-term needs for a good 24 months or so, you should feel comfortable having some of your money in a riskier asset that could yield strong returns.
Even though Social Security is designed to keep up with inflation, it often fails. Your best bet, therefore, is to come up with your own plan to beat inflation so you can avoid financial stress and enjoy your retirement to the fullest.
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