Social Security is one of the most crucial functions of the U.S. government. Last year, the program paid roughly $1.5 trillion to 68 million Americans, 51 million of whom were retired. Many of these retired Americans rely on the program for a significant portion of their incomes.

Originally intended as one of three income sources for retirees along with employer pensions and personal savings, Social Security’s role has grown as pensions have become rare for most. Many lower-income earners are unable to save in 401(k) plans, making them heavily reliant on Social Security benefits. In fact, one in seven retirees have no other regular income source.

Regardless of where your retirement income comes from, most are feeling the pinch after years of elevated inflation. If you are worried about having enough money in the year to come, you’re not alone. A recent survey from The Senior Citizen League (TSCL) — a senior citizen advocacy organization — showed 62% of seniors fear that soon they won’t be able to cover basic essentials like food and utilities.

How did we get here?

A brief history of the COLA

Most retirees are well aware that each year their Social Security benefits get a bump. This is the annual cost-of-living adjustment (COLA) the Social Security Administration (SSA) makes in an effort to shield retirees from inflation. The COLA is now automatic, but it wasn’t always so.

Prior to 1975, an act of Congress was required to change SSA’s benefits. That meant large stretches of time could pass with no raise. When inflation hit with a vengeance in the early 1970s, it created enough political pressure for Congress to act. A new law was passed that created an automatic adjustment each year: the COLA.

This COLA is calculated today as it was in 1975, when it first went into effect. Each year, the SSA takes an inflation metric known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W); averages the CPI-W numbers from July, August, and September; and adjusts benefit checks accordingly for the following year.

In 2025, your checks will be 2.5% higher than they were this year.

The problem with the COLA

You may have noticed something odd about the metric the SSA uses. The CPI-W tracks prices for workers, not retired folks. There are key differences in the spending needs of these two groups; chief among them is healthcare. Retired Americans spend a much larger portion of their income here, and healthcare costs have been rising faster than many other categories for some time.

Even if this difference is subtle — and it is, usually only a fraction of a percentage each year — over time it compounds, and the difference is no longer subtle. TSCL estimates seniors have lost more than 30% of their actual purchasing power since 2000.

Calls have been made to switch to a metric that more accurately tracks the spending of seniors specifically, but little progress has been made. In the meantime, seniors must contend with the reality of seeing their budgets squeezed.

Careful financial planning has never been more important

Prudent investing with retirement in mind can help you avoid the pain of too little savings when the time comes; maximizing personal savings is a must, especially in tax-advantaged accounts. If your employer offers matching contributions to a 401(k), do everything in your power to put away enough to reach your employer’s limit. You’re leaving money on the table if you don’t.

If you’re nearing retirement, consider delaying when you do so. While you can start claiming SSA benefits as early as age 62, delaying until age 70 maximizes your monthly benefit. The difference can be substantial.

The $22,924 Social Security bonus most retirees completely overlook

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