Will Social Security Keep Up With Inflation?

An estimated 65 million Americans rely on Social Security income in retirement. But for many, the program is falling short in the face of rising living costs. While Social Security is designed to keep up with inflation in theory, in practice, it's doing a less-than-stellar job of achieving that goal.

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Social Security COLAs
Back in the day, the initial Social Security benefit amount you qualified for was the same amount you'd receive year after year. At least that's how the program worked back in 1940, when beneficiaries received the same payout for 10 years before Congress stepped in and decided to approve a benefits increase. In 1972, Congress enacted a provision allowing for automatic annual cost-of-living adjustments, or COLAs, for beneficiaries across the board. Hailed as Social Security's stealth inflation-zapping strategy, COLAs have given beneficiaries a bump in benefits for all but three years since 1975. The purpose of COLAs is to allow recipients to retain their purchasing power in the face of inflation by increasing benefits on an as-needed basis.

The problem, however, is that some COLAs have been far more generous than others. Take 1980, when benefits rose 14.3%, the highest single year boost since COLAs were first applied to Social Security. That was a pretty good year for recipients, as was 1981, which saw an 11.2% increase. But in recent years, COLAs haven't been quite as substantial. Over the past 10 years, COLAs averaged closer to the 2% mark, and three of those years saw no COLA at all. In fact, current beneficiaries saw no COLA going into 2016.

Data source: Social Security Administration. Year indicates when the COLA was announced and took effect Jan. 1 of the following year.

How COLAs are determined
The major issue with COLAs is that they're based off the Consumer Price Index, or CPI, which measures price fluctuations for popular consumer goods and services. When the CPI records a rise in prices, a COLA is applied to Social Security benefits, but when the CPI shows a decline in prices, benefits stay the same.

So what's the problem? The CPI is only a limited measure of the (often-rising) living costs faced by those who rely on Social Security. For example, this year, Social Security recipients didn't get a benefits boost at all because gas prices dropped close to 30% in the period from which the relevant CPI data was obtained. But just because gas prices fell doesn't mean that other costs, such as housing and healthcare, didn't climb, and it's those and other expenses that tend to hit retirees the hardest.

Even when beneficiaries do get a boost, it's not always enough to keep up with inflation. According to a study by the Senior Citizens League, since 2000, seniors have lost a good 31% of their buying power, largely because their Social Security benefit increases have failed to keep pace with the nagging beast that is inflation. Furthermore, since 2000, COLAs have increased Social Security benefits by only 41% while senior living expenses have climbed 84%, leaving many beneficiaries to somehow pick up the slack.

In other words, despite its best efforts, Social Security isn't doing a great job of keeping up with inflation. And while we can't predict the future, one thing's for sure: If COLAs continue to fall short, those who depend on the program the most will inevitably find themselves left in the lurch.