Inflation is the sort of thing that tends to creep up on people -- at least most of the time. In recent years, it's been in everyone's face -- and has made it very difficult for working Americans and retirees alike to keep up with their bills.
Thankfully, Social Security benefits, which many retirees rely on, are protected from inflation to some degree. That's because those benefits are eligible for an annual cost-of-living adjustment, or COLA.
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But data from The Senior Citizens League, an advocacy group, highlights what a poor job those COLAs have done through the years. Between 2010 and 2024, seniors on Social Security lost 20% of their buying power due to COLAs failing to actually keep up with rising costs as they relate to retirees.
It's for this reason that advocates are pushing for changes to the way Social Security COLAs are calculated. But even if those changes come to be, it doesn't mean that retiring on Social Security alone will be a good idea.
A more targeted measure
The current index Social Security COLAs are based on is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The problem is that the CPI-W does not do a good job of capturing the costs retirees face.
Put another way, the spending patterns of seniors on Social Security are apt to differ from those of people who are still working. And also, it's not a given that Social Security recipients live in urban areas, and the CPI-W specifically focuses on urban wage earners. So all told, there's a huge disconnect.
That's why advocates have been pushing to base Social Security COLAs on the Consumer Price Index for the Elderly instead. That index would likely place more weight on spending categories like healthcare that are a huge expense for seniors in particular. If lawmakers agree to this change, it could result in more generous COLAs in future years.
Social Security won't be enough, even with better COLAs
Larger COLAs could be a boon to retirees on Social Security. But even if lawmakers implement this change, it won't suddenly make it a good idea to retire on Social Security alone.
The reality is that if you earn an average wage, Social Security will probably replace about 40% of it, assuming that benefit cuts don't happen. But most retirees can't live very well on a 60% pay cut. So even if changes occur that lead to more generous COLAs, it's still important to have adequate savings so you can supplement your monthly Social Security checks.
To that end, aim to start funding an IRA or 401(k) plan as early on in your career as you can, and invest that money so it's able to grow. If you're not sure what investments to choose, you can consult a financial advisor.
If you're not interested in hiring a financial advisor, you can always fall back on an S&P 500 index fund. This effectively allows you to invest your retirement savings in the broad stock market. It's a great way to take the guesswork out of investing while making sure your portfolio is diversified.
A new, senior-specific formula for calculating Social Security COLAs could be a very good thing for retirees and lead to yearly raises that actually allow recipients to keep up with inflation. But that won't change the fact that those benefits were never designed to replace workers' paychecks in full. And you shouldn't make the mistake of thinking you'll be just fine on Social Security alone in retirement when in reality, that's likely to lead to a world of financial stress and heartache.
