If you purchased something for $5 back in 1913, it would cost roughly $129 today. We can thank inflation for that.

Inflation is what causes the cost of goods and services to increase over time, and it's the reason why $1 today won't be worth $1 in 20 years' time. It's also the reason why so many Social Security beneficiaries struggle financially during retirement.

Social Security's COLAs: A flawed system

Social Security is technically designed to keep up with inflation, but in practice, that hasn't really been happening. Benefits are based on workers' 35 highest-paid years of earnings, coupled with the age at which they're claimed. For example, if you're entitled to $1,500 a month based on your work record, you'll start out collecting $1,500 a month if you file at full retirement age (either 66, 67, or somewhere in between, depending on year of birth). Filing before or after full retirement age, meanwhile, reduces or increases that benefit.

Social Security card sticking out in a pile of bills


However, the amount you start out collecting on a monthly basis won't necessarily be the amount you collect for life. That's because Social Security benefits get a yearly cost-of-living adjustment, or COLA. COLAs were introduced back in the 1970s, and their purpose is to protect seniors from losing buying power in the face of inflation. The problem, however, is that COLAs often do a poor job of really helping seniors keep up.

Part of the issue boils down to how COLAs are calculated. At present, they're based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the cost of common goods and services increases, Social Security benefits tend to go up. But the costs tracked by the CPI-W don't really reflect the costs seniors commonly incur, and as such, it's an imperfect measure.

How imperfect? The Senior Citizens League reported last year that Social Security benefits have lost 34% of their buying power since 2000.

Keep in mind that just because Social Security benefits are eligible for an annual COLA doesn't mean they always end up getting a raise. In fact, over the past decade, there were three years in which beneficiaries' raise was a big fat $0. Therefore, while Social Security is supposed to help seniors retain their purchasing power in the face of inflation, it's thus far proven to fall short.

Making up for Social Security's shortcomings

One thing many seniors don't realize about Social Security is that living on those benefits alone just isn't feasible. Inflation aside, those benefits are only designed to replace about 40% of the average earner's pre-retirement income, when most seniors need roughly double that amount to live comfortably.

Thus, it pays to save independently for retirement to ensure that you don't wind up relying too heavily on Social Security to pay the bills. Not only that, but you should make sure to invest your savings in a manner that outpaces inflation to give yourself an edge later in life.

Imagine you were to sock away $300 a month over the course of 30 years. All told, you'd end up putting in $108,000 of your own money. But if you were to invest your savings in stocks, you'd likely generate an average annual return of 8% over a 30-year period, since that's actually just below the stock market's historical average. And, after three decades, you'd wind up with about $408,000. That's a $300,000 gain on investments alone, which, based on historic figures, should more than outpace the general rate of inflation between now and 2049.

If you really want to retire comfortably on Social Security, don't make those benefits your sole source of income. Amass some savings, or figure out another means of supplementing your income, like working part-time. Unfortunately, Social Security has historically done a poor job of keeping up with inflation, and the last thing you want to do is struggle financially in retirement because of it.