Social Security COLAs can mask a loss in total buying power

Retirees may experience a net loss in buying power despite receiving a larger Social Security Cost of Living Adjustment (COLA). This occurs because most retirees do not depend solely on Social Security, as benefits replace only around 40% of pre-retirement income.

To supplement this income, seniors withdraw funds from 401(k)s or savings accounts. These accounts do not have automatic inflation adjustments. When inflation is high, funds in those accounts often lose value, particularly for retirees who maintain conservative investments to ensure they can pay their bills.

Social Security benefits are adjusted annually to account for rising prices based on year-over-year changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the CPI-W shows that the average prices of a basket of goods and services have increased, retirees receive a benefits bump equal to that percentage increase. This mechanism ensures that Social Security benefits do not lose buying power, but it does not protect the rest of a retiree's portfolio.