While seniors may be excited about their cost-of-living adjustment, the harsh truth is that this isn’t a raise, even though it’s often referred to that way.
Each year, many retirees are excited to find out how big a Social Security raise they’re getting. This “raise” comes in the form of a cost-of-living adjustment (COLA) that usually increases benefits. Because of the COLA, seniors get a slightly bigger check starting in January of most years, compared with the amount they received before.
While it may seem like it makes good sense for seniors to get excited about receiving more money, it’s actually really important that retirees come to terms with a harsh truth about their COLA.
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The COLA isn’t really a raise, despite the fact that you’re getting more money
The most important thing that every senior must realize is that their Social Security COLA might be referred to as a raise, but it isn’t one in any traditional sense of the word.
When an employer gives you a raise, they usually give you more money based on your accomplishments. The bump to your salary is typically not tied specifically to the inflation rate. So, as a practical matter, your salary increase when you get a normal raise will ideally give you more buying power over time.
The COLA, on the other hand, is not intended to give you more buying power. It’s intended to keep your buying power the same as it was the year prior and the year before that, and so on. That’s why the COLA formula calculates the benefits increase based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The Social Security Administration uses a formula that gives you a COLA equal to the percentage increase of the CPI-W during the third quarter of the year. If this financial index shows that prices on a basket of goods and services during the months of July, August, and September of 2024 are higher than the cost of that same basket of goods and services in 2023, retirees get a Social Security benefits bump equal to the increase.
The problem with this approach, though, is that this COLA doesn’t increase the disposable income you have available to spend. Sure, you’ve been given more money — but you have to pay all that extra out just to buy the things you were buying anyway that you’re now paying a higher price for. You haven’t gained any ground with the “raise,” and you can’t improve your lifestyle because of it.
There’s an even bigger problem with COLAs
While seniors may be disappointed to realize that the COLA they’re getting isn’t a raise but just designed to help their lifestyles stay stable, there’s actually even worse news that retirees must come to terms with now. Specifically, the COLA probably isn’t doing what it is supposed to, and it’s not stopping seniors from losing ground. Instead, the Senior Citizens League estimates that retirement benefits have lost 36% of their buying power since 2000.
The big problem is with the basket of goods and services being used to calculate the COLA. Right now, the formula tracks changes in the prices of goods and services used by urban wage earners and clerical workers. Seniors spend differently than this group, though, devoting more of their money to things like healthcare expenses that tend to experience above-average inflation. Since the inflation they experience is being undercounted, their COLA helps a bit in terms of their benefits retaining their real value, but most seniors still do end up with expenses increasing more than the cost of their raise.
A “raise” that gives you the ability to buy less than you could before isn’t really a raise. Seniors should come to terms with that to make sure they aren’t relying too much on their benefits checks or expecting their COLA to do more for them than it will in the end.