Millions of seniors rely on their monthly Social Security benefits to stay afloat in retirement. But for some people, those benefits constitute the bulk of their retirement income — or even all of it. That’s a problem, seeing as how the program’s cost-of-living adjustments (COLAs) have sorely failed to keep pace with inflation through the years.

Why Social Security’s COLAs don’t get the job done

The purpose of Social Security COLAs is to help ensure that seniors are able to keep up with rising living costs. The problem, though, is that Social Security COLAs don’t necessarily rise in accordance with the expenses seniors are most likely to face. That’s due to a flaw in the way they’re calculated.

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Data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to determine how much Social Security benefits rise from one year to the next. But the CPI-W is not a good measure of the expenses that are specific to Social Security recipients — namely, because many aren’t wage earners, and because many don’t reside in urban areas.

The Senior Citizens League recently reported that 2024’s average Social Security payments are only worth about $0.80 on the dollar compared to 2010. This means that Social Security beneficiaries have lost about 20% of their buying power over the past 14 years. It would take another $4,442 per year, on average, in Social Security benefits to bring their value back to 2010 levels.

Of course, this begs the question: Will lawmakers change the way Social Security COLAs are calculated? The answer is, maybe. But it’s also not something seniors can bank on.

Don’t get hurt by insufficient Social Security COLAs

The best way to avoid a situation where you don’t struggle to maintain your buying power from year to year in retirement is to set yourself up to be minimally dependent on Social Security to begin with. If you bring a large nest egg into retirement and use Social Security for extras, it won’t matter so much if your benefits don’t increase substantially from one year to the next year.

To be successful in building a large nest egg, give yourself time. And know that with a long enough window, you can save quite a large amount of money, even if you’re not parting with one-third of your paycheck every month.

Imagine you save $500 a month for retirement over a 35-year period. This gives you some leeway to first start saving in your early 30s if it’s not feasible to do at an earlier age.

If your investments generate an average annual 8% return, which is a bit below the stock market’s average, you’ll be looking at just over $1 million. And if you’re able to save $500 a month over a 40-year period at an 8% return, you stand to retire with a little more than $1.5 million.

Even if you’re only able to bring a small amount of savings into retirement, that’s money you can use to compensate for the minimal Social Security COLAs you may be looking at. So don’t assume your retirement is doomed with a $150,000 nest egg, either.

In time, lawmakers may finally address the glaring problem with Social Security’s COLA calculation. But until then, it’s best to take matters into your own hands so your finances don’t suffer.

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