Social Security Cost-of Living (COLA) Is Leaving Seniors Behind

FatCamera / E+ via Getty Images

Social Security is a vital safety net for millions of American seniors. Around 70.6 million people receive benefits from the program, according to the Social Security Administration. That’s a lot of Americans!

The Social Security Administration calculates an annual Cost of Living Adjustment (COLA) to account for rising living costs. The idea is that seniors will continue to have the same amount of “buying power” despite prices rising.

However, there’s a growing concern that the current COLA formula doesn’t accurately reflect the true inflation experienced by seniors. While the Social Security COLA is supposed to adjust for inflation, it is necessarily a predictive adjustment. The SSA uses a calculation to guess how inflation will look in the following year. 

The current formula fails to reflect seniors’ rising costs in many cases, though, leading to a decline in their purchasing power and financial security. 

Why Does It Matter?

Young stressed Caucasian couple facing financials troubles, sitting at kitchen table with papers, calculator and laptop computer and reading document from bank, looking frustrated and unhappy
Source: Cast Of Thousands /
Those currently planning for retirement should consider the loss of buying power Social Security is set to lose by the time they retire.

Even if you aren’t currently receiving social security, COLA still matters. Social Security is a cornerstone of many retirement plans. People often use this foundation to build their wealth and financial security in retirement.

When the COLA fails to keep pace with seniors’ rising costs, it erodes their purchasing power.

This means that Social Security will buy less over time, forcing seniors to dip into their savings and reducing its ability to provide financial security. This impact affects real people. Seniors may be unable to pay for essential expenses, like medication and rent. Those planning for retirement may be forced to save more instead of relying on Social Security payments. 

The Shortcomings of the Current COLA Formula

Businessmen use a calculator to calculate income and expenses in order to manage budgets to pay off credit card debt.
Source: PaeGAG /
The COLA formula is re-calculated each year to determine the next year’s increase.

The Social Security COLA is based on the Consumer Price Index (CPI), a key measure of inflation. The Bureau of Labor Statistics calculates this index by tracking the average price of many goods and services that the typical household purchases. 

According to their website, these items include food, rent, apparel, medical care, recreation, education, and other essential goods. This information is then used to determine the annual COLA adjustment for Social Security benefits. 

That said, this method has several downsides, though. While the CPI encompasses a wide range of goods and services, it’s based on the average household, not the average senior. While it might capture price fluctuations in electronics or clothing, it may not accurately reflect the rising costs of essential senior needs, such as:

  • Housing: Seniors tend to spend much of their income on rent and property taxes. However, these prices are highly localized, so COLA will not accurately catch price increases nationwide. It’s simply not possible!
  • Healthcare: Retirees spend a proportionally higher portion of their income on healthcare than the average household. Medical care costs tend to rise faster than general inflation, and seniors will be most impacted by this disparity. 
  • Prescription Drugs: Prescription drug prices are notoriously even higher than medical care costs. 

On top of this, there are whispers of changes to the COLA calculation that would decrease the amount seniors receive by about 0.24% a year. That’s despite Social Security benefits losing over 30% of its purchasing power since 2000, according to The Senior Citizen League

The Impact on Seniors

Shocked upset elderly couple getting bad news, finding fraud, money stealing, loss, overspending, financial problem, holding calculator, using laptop, staring at monitor
Source: fizkes /
It’s easy to whittle impacted seniors down to a number, but it’s important to remember that these seniors are real people.

When COLA fails to keep pace with rising costs, it affects real people. Seniors face a real decline in their purchasing power, leading to challenging in maintaining their well-being. No senior should have to choose between bread and prescription medication, but that’s exactly where the modern COLA calculation leaves many people. 

According to the AARP, 1 in 10 adults over the age of 50 struggled with food insecurity in 2022. The National Low-Income Housing Coalition reported that 49% of extremely low-income renters who struggle to afford rent are seniors. These things are already happening, and COLA may make them worse in the future.

Financial strain can force seniors to rely on food banks, energy assistance programs, and other social services to meet basic needs. Sadly, in many areas, these resources are overstretched, preventing some seniors from receiving the help they need. 

When struggling financially, seniors may have to turn to family members for help with groceries, bills, or even housing. This can create a burden on younger generations who are trying to save for retirement. 

It’s a bit of an unending cycle. Seniors can’t afford their needs on Social Secuirty, so they rely on family members. These families cannot save for retirement, so they must rely on Social Security almost completely. Then, these families cannot afford their needs on Social Security, so they have to rely on their younger family members. And the cycle continues. 

COLA will likely get even less sufficient as the decades pass. So, if you’re not yet receiving Social Security, these problems should get your attention. 

Potential Solutions

Source: teegardin / Flickr
Changes in tax laws could also potentially help seniors impacted by rising costs.

The limitations of the current COLA formula highlight the need to reform Social Security benefits to reflect the rising costs seniors face accurately. Luckily, there are many potential fixes!

One of these is a senior’s specific CPI basket. Instead of relying on the Consumer Price Index that tracks all household spending, this calculation (often called the R-CPI-E) would track the items that seniors tend to purchase, like healthcare and groceries. It would more accurately measure inflation for seniors, leading to more targeted COLA adjustments. 

Sadly, developing and maintaining a separate CPI would require additional resources from the Bureau of Labor Statistics. 

Smaller adjustments could be made, too. Currently, the COLA is based on data from the prior year’s third quarter (July to September). Some suggest that adjustments occur more often to account for jumps in inflation, like what we saw in 2022 and 2023. 

More tax breaks and targeted tax credits could also help seniors offset rising costs. 

Our Social Security guide contains more about these potential solutions and how to plan for retirement despite the problems with COLA. 

Take This Retirement Quiz To Get Matched With An Advisor Now (Sponsored)

Are you ready for retirement? Planning for retirement can be overwhelming, that’s why it could be a good idea to speak to a fiduciary financial advisor about your goals today.

Start by taking this retirement quiz right here from SmartAsset that will match you with up to 3 financial advisors that serve your area and beyond in 5 minutes. Smart Asset is now matching over 50,000 people a month.

Click here now to get started.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.