Inflation will affect your benefits more than you might think.
Inflation has been a hot topic for years, but it’s especially important for retirees and workers on the verge of retiring. Once you’re living on a fixed income, rising costs can have a much bigger impact on your finances.
It’s especially concerning if you’re depending primarily on Social Security — which is the case for the 60% of current retirees who say their benefits are a major source of income, according to 2024 poll from Gallup.
However, many U.S. adults are unclear about how, exactly, inflation affects their Social Security. That can lead to some misunderstandings in retirement. Here’s everything you need to know about inflation and your benefits.
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How does inflation affect Social Security?
A whopping 66% of U.S. adults are unaware that Social Security benefits are protected against inflation, according to a 2024 report from the Nationwide Retirement Institute. Close to 60% also believe that their benefit will be lowered if deflation occurs.
In reality, your benefit will not be reduced if prices decline, and Social Security is designed to keep up with inflation through its annual cost-of-living adjustment (COLA). That said, whether these COLAs actually protect benefits against inflation is debatable.
Since 2010 alone, benefits have lost a whopping 20% of their buying power, according to a 2024 report from nonprofit group the Senior Citizens League.
Furthermore, in eight out of the last 15 years, the inflation rate has outpaced the COLA for that year. Even much higher-than-average COLAs haven’t managed to keep up with rising costs. In 2022, for example, the 5.9% adjustment was the highest since 1982. Yet the inflation rate that year was 7%.
Can Social Security fix this problem?
The most straightforward way to ensure benefits maintain their buying power is to increase the COLAs, and some experts have suggested changing the way the adjustments are calculated.
The COLA is based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Social Security Administration averages the CPI-W values throughout the third-quarter months of July, August, and September, then compares that figure to the prior year’s. If the current year’s average is higher, the difference will be the COLA for the next year.
Some experts have pointed out, though, that the CPI-W isn’t the most effective index for tracking seniors’ living costs, as it’s focused on how prices affect workers. Retirees often spend far more on expenses like healthcare and housing compared to workers, and these costs, in particular, have been skyrocketing in recent years.
Re-evaluating the COLA calculations to better reflect retirees’ needs would likely result in larger adjustments each year. However, because the program is also experiencing cash flow problems, the Social Security Administration is unlikely to spend more on COLAs — exacerbating its already serious financial woes.
What can you do right now?
Inflation may be out of your control, but staying informed can help you make the best choices for your retirement.
If benefits continue losing buying power, you may need to save more than you currently expect. Now is the best time to start supercharging your savings, especially if you still have a few years before retirement. The more you can reduce your dependence on Social Security, the better off you’ll be if inflation wreaks havoc on your benefits.
You can also consider delaying filing for benefits to increase the size of your monthly checks. Waiting until age 70 to claim will earn you 100% of your benefit as well as a bonus of at least 24%. That can amount to hundreds of dollars more per month, which can help your payments go further even if they lose buying power.
Social Security may be shaky right now, but it’s still a significant source of income for millions of retirees. When you know how inflation will affect your finances, you can start taking steps to build a more secure retirement.
