Is the Social Security COLA Formula Broken? Here’s What Experts Are Saying.

Retirees who collect Social Security often depend heavily on their benefits to help them pay the bills. Since Social Security was created to help keep seniors out of poverty, it’s important that these benefits are worth a meaningful amount of money so retirees can use them to cover some of their essential costs.

To help ensure that the value of benefits does not erode due to inflation, cost-of-living adjustments (COLAs) happen automatically in most years. Unfortunately, many experts believe that the formula used for these automatic adjustments is flawed and has resulted in retirees losing a substantial amount of their buying power.

Here’s the potential problem with the COLA, along with some options to provide retirees relief from the current issues.

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Social Security benefits have lost 20% of their buying power due to a COLA flaw

According to The Senior Citizens League, benefits lost 20% of their buying power between 2010 and 2024 alone. And between 2016 and 2026, there was a 13.7% decline in the buying power of Social Security benefits.

This is not supposed to happen. Automatic protection against inflation is part of the Social Security benefits program, and, in fact, retirees receive a raise most years. In 2026, for example, the Social Security cost-of-living adjustment was 2.8%.

But The Senior Citizens League and many other experts believe that a flaw in the COLA formula is the reason for the decline in the real value of benefits. Specifically, the issue is with the price index used to calculate the size of the benefit bump Social Security recipients will receive each year.

The problem with how COLAs are calculated

To understand why COLAs may be falling short, it’s helpful to take a quick look at how the increase in benefits is calculated. Under the current system, Social Security recipients receive a COLA equal to the percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Third-quarter CPI-W data is compared with the prior year’s data, and benefits are increased based on the percentage change in the cost of a basket of goods and services.

Unfortunately, experts believe that looking at CPI-W underestimates how large the raise must be, since the spending habits of urban wage earners and clerical workers differ from those of seniors. Even with Medicare or a Medicare Advantage plan, retirees tend to spend more of their money on healthcare than their younger counterparts. They also often spend a larger share of their income on housing.

The areas where retirees tend to spend a disproportionate share of their income generally see higher inflation than many other categories of spending. The result is that the COLA formula underestimates the inflation retirees actually experience over time because it doesn’t accurately capture some of their biggest spending increases.

A change has been proposed, but it probably won’t happen

There have been various efforts over the years to change this formula.

One common proposal is to switch from CPI-W to CPI-E in the COLA calculation, since CPI-E is a price index that tracks the spending habits of the elderly. However, CPI-E is experimental, and using CPI-E would also result in larger increases to benefits in most years. The effect of this would be larger raises without an increase in revenue to pay for the extra expense.

It’s unlikely this proposal will be adopted anytime soon because it would make Social Security’s finances worse at a time when the trust fund is already in imminent danger of running short. This means benefits will likely continue to lose buying power, so seniors must plan accordingly and ensure they have sufficient funds in retirement accounts to supplement Social Security as benefits decline over time.

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