Millions of seniors depend on Social Security to pay the bills in retirement. But in recent years, those benefits have been letting retirees down.

Since 2000, Social Security beneficiaries have lost 34% of their buying power, according to data from the Senior Citizens League. The reason? The cost of most retiree expenses has risen faster than Social Security's annual cost-of-living adjustments, or COLAs.

Since the year 2000, COLAs have averaged just over 2%. Meanwhile, the cost of Medicare Part B premiums, which enrollees are required to pay, has risen 195% since 2000. Prescription drug costs have also jumped 188% in the past 18 years, while property taxes have climbed 129%, leaving senior homeowners struggling to keep up.

Social Security card


Why the disparity? It stems from the way COLAs are calculated. For years, they've been based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which, as the name implies, tracks spending among urban and clerical workers. The problem, however, is that these workers are mostly, by nature, non-retirees, and so their expenses and spending habits differ tremendously from those of seniors. In other words, the CPI-W is an inadequate benchmark for determining how much of a raise seniors need, yet it's the formula we've been sticking with for years.

Of course, lawmakers are aware of the problem, but have yet to come up with a better means of determining COLAs. As a result, seniors have been stuck in a holding pattern and suffering for it.

Don't count on Social Security alone

All of this underscores the importance of saving for retirement independently rather than relying on Social Security alone. One thing many workers don't realize is that Social Security was never designed to sustain retirees by itself. At best, those benefits will replace about 40% of the average senior's pre-retirement income, and most seniors will need closer to 80% to pay their bills once they stop earning a paycheck. Even if COLAs were to get more generous in the coming years, Social Security will still fall short in covering seniors' living expenses, which is why it's on workers to bridge that gap by building savings.

Now building a strong nest egg is easier said than done, especially since workers today have an overwhelming tendency to max out their paychecks. The good news, however, is that those who give themselves a lengthy window can establish healthy savings by making modest yet consistent retirement plan contributions over time. The following table further illustrates this point:

Start Saving $300 a Month at Age:

Ending Balance by Age 65 (Assumes a 7% Average Annual Return):














Of course, saving steadily is only half of the equation; it's just as important that workers invest their savings aggressively to maximize growth. The above example assumes an average annual 7% return on investment, which is a few percentage points below the stock market's average. Loading up on stocks is a good strategy for anyone with a 10-year savings window or longer, as this allows for ample time to ride out potential market downturns. And though many workers fear stocks and therefore stay away from them, they're an extremely effective investment option for outpacing inflation -- something COLAs have been failing to do.

Since living costs are likely to keep increasing, and Social Security is likely to keep lagging, the best defense for seniors is to enter retirement with a robust level of savings. Otherwise, a growing number of Americans will find themselves suffering financially like so many of today's seniors are.