As the Social Security Administration (SSA) is required by law to prevent inflation from eroding the purchasing power of benefits paid to recipients, they in turn make cost-of-living adjustments (COLA): automatic benefit increases.

In this post, we’ll review how COLA is calculated, highlight some historical data, and explain why—even with COLA—the purchasing power of Social Security has declined over time.

How COLA is calculated

Cost-of-living adjustments are based on the Consumer Price Index (CPI-W), an estimate of the average change in how much goods/services cost that are purchased by households whose income is earned primarily via hourly wages and clerical work. The index loops in more than 200 consumer products across housing, food and beverage, apparel, transportation, and healthcare categories (and more!).

The Bureau of Labor Statistics calculates these adjustments on a monthly basis, with the Social Security Administration then announcing them every October. Recipients typically see the corresponding benefit beginning in January of the following year.

COLA increases are not guaranteed, nor is COLA ever negative. With respect to how the program works, Social Security benefits rise if there is a measurable increase (0.1% or higher) in the price index from year to year—or, more specifically, between average prices in the third quarter of the current and previous year.

For example, the average CPI-W was 301.236 for Q3 2023. During this same period in 2024, the CPI-W was 308.729: reflecting an increase of 2.49%. As a result, Social Security recipients received a cost-of-living increase of 2.5% in 2025.

History of COLA increases by year

Social Security benefits at one time only increased if and when Congress enacted special legislation; but when the U.S. enacted the COLA provision in 1972, annual COLAs commenced in 1975 (with the law stipulating automatic increases only if the Consumer Price Index rose by at least 3%). In 1986, Congress eliminated the 3% trigger and thus tied COLAs directly to the Consumer Price Index.

Since then, only three years—2010, 2011, and 2016—didn’t see benefits rise at all. The biggest increase (in 1981), meanwhile, triggered a 14.3% boost for Social Security recipients.

Chart Sources: Social Security Administration

COLA and purchasing power

While the COLA concept may sound great on paper, Social Security’s purchasing power has actually eroded over time. Why? Because the CPI-W underweights specific sectors that are hit with very steep prices including prescription drugs, homeowners insurance, property taxes, and fresh fruits and vegetables. What’s more, different indexes are used to measure Medicare and Social Security adjustments, resulting in a faster rate of increase for Medicare premiums.

For example, between 2000 and 2018, Social Security COLAs averaged a 2.2% annual increase: considerably less than the 6.1% annual rise in standard Medicare Part B premiums. While the hold harmless provision (a law that prohibits Medicare Part B premiums from reducing Social Security benefits) protects some beneficiaries, it doesn’t cover everyone and is far from perfect; see the forthcoming FAQs for additional clarity about this topic.

According to the Senior Citizens League—one of the nation’s largest nonpartisan senior groups—Social Security benefits have lost 36% of their buying power since 2000 and recipients would need an extra $516.70 more per month to maintain the same level of buying power they had back in 2000.

The League states that while COLAs boosted Social Security benefits by 78% between January 2000 and February 2023, the cost of goods and services purchased by typical retirees rose over 141.4% during that same time period.

These are just some of the reasons why you shouldn’t depend solely on Social Security to fund your retirement.

In sum: COLA and Social Security impacts

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.