Social Security provides critical benefits to millions of retired seniors, and those who are near retirement may be banking on that income source for their golden years. But a new survey by MassMutual reveals that 18% of Americans aged 55 to 65 lack awareness of one important Social Security feature: annual cost-of-living adjustments (COLAs).

What are COLAs and why are they important?

Social Security COLAs were introduced during the 1970s, and their purpose is to help seniors maintain their buying power in the face of inflation. Your monthly Social Security benefit is calculated by taking your average monthly wage over your 35 most profitable years in the workforce, adjusting it for inflation, and applying a special formula to that number.

That benefit is the amount you're entitled to collect each month, provided you file for Social Security at your full retirement age. Depending on your year of birth, that's either 66, 67, or somewhere in between.

Social Security card


The monthly benefit you start out with won't stay exactly the same throughout your retirement, though, because each year, seniors are entitled to a COLA that could raise that number substantially -- or not.

The problem with COLAs is that annual raises aren't guaranteed. COLAs are calculated based on fluctuations in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. When the cost of common goods and services rises, Social Security benefits follow suit.

But when the cost of common goods and services holds steady or goes down, seniors on Social Security don't get a raise. Thankfully, the worst that can happen is that benefits remain stagnant; they can't go down from one year to the next.

Social Security COLAs are announced in October and go into effect the following January. Seniors don't need to apply for a COLA; they happen automatically.

What recent COLAs have looked like

Back in the mid-1970s and early 1980s, COLAs ranged from close to 6% to upward of 14% to keep up with inflation. In recent years, however, they've been stingier:


Social Security COLA












Why COLAs have been ineffective

Though COLAs are designed to help seniors maintain financial security as the cost of living climbs, they've done a poor job in recent years of achieving that goal. In fact, since the year 2000, seniors on Social Security have lost an estimated 33% of their buying power, due in part to the fact that COLAs have been minimal, and also because seniors don't always see the raise they're entitled to.

Why is that the case? Seniors who are on Medicare and Social Security at the same time have their Part B premiums deducted directly from their monthly benefits. If Medicare premiums go up enough, COLAS can get wiped out.

Should you count on COLAS?

If you'll be collecting Social Security in the near future, you should know that COLAs exist. But you also shouldn't put a lot of faith in them.

If you really want to maintain your purchasing power in the face of inflation, do your best to save a lot for retirement. The money in your IRA or 401(k) can stay invested so it grows in a manner that outpaces inflation rather than lags behind it, thereby giving you more long-term financial security than COLAs can.