Does Social Security Really Keep Up With Inflation? Here’s the Truth

During your working years, it’s typical to get a raise from one year to the next. Sometimes, that raise is based on merit. Other times, it may be a basic cost-of-living raise — enough of a boost to help you maintain your buying power in the face of rising costs, but not necessarily enough of a raise for you to really get ahead financially.

Social Security works similarly. Each year, benefits are eligible for an automatic cost-of-living adjustment, or COLA, that’s tied to inflation. And while it’s possible for Social Security to not rise from one year to the next, historically, benefits have increased most years.

But that doesn’t mean Social Security is able to fully keep up with inflation. Data shows that the program’s COLAs tend to fall short, leaving retirees in a tough spot.

Social Security recipients have lost buying power

Social Security COLAs are based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the CPI-W increases, a COLA is applied to benefits based on third quarter movement.

But when there’s a decrease in the CPI-W, Social Security benefits stay where they are. There’s no such thing as a negative COLA, thankfully.

This might seem like a perfectly adequate system. But it has a major flaw.

The CPI-W, while perhaps a decent measure of broad inflation, is not very reflective of the costs seniors on Social Security tend to face. For this reason, COLAs have long failed to keep pace with the expenses that tend to rise for retirees, like healthcare.

The Senior Citizens League says that as of 2024, Social Security recipients had lost 20% of their buying power since 2010. But it’s not that benefits didn’t go up during that time — they absolutely did. However, the data found that the COLAs retirees received during that period just weren’t enough to keep up with actual senior costs.

It’s best to have income outside of Social Security

If you earn an average paycheck, you can expect Social Security to replace about 40% of your wages. That amounts to a pretty large pay cut, even if you are able to reduce your spending in retirement.

That’s one good reason not to retire on Social Security alone. Another, though, is that COLAs don’t do a good enough job of keeping pace with inflation. If you want to maintain your buying power throughout retirement, build up an investment portfolio and put your money into assets that can beat inflation.

It’s not a good idea to invest too heavily in stocks as a retiree. But it’s also not necessarily a bad idea to have about 40% of your portfolio in stocks for growth while putting the other 60% into bonds and cash, which could also generate some growth, albeit perhaps less than the stock portion.

And even if your retirement portfolio is invested very conservatively and therefore doesn’t generate a lot of growth, that’s still money you can dip into as a supplement to Social Security. Given that benefits don’t tend to keep up with inflation despite the promise of COLAs, that’s important.

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