Social Security Benefits Keep Losing Buying Power. Here's What Lawmakers Can Do About It.

Many people inevitably wind up retiring with little to no savings, thereby becoming very reliant on Social Security to cover their costs. That's a problem for a couple of reasons.

First, the average monthly retirement benefit today is only about $2,083. On an annual basis, that's a $25,000 income. Even with careful budgeting and a massive dose of frugality, it can be difficult to make an income that size work.

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The other issue with depending heavily on Social Security is that those benefits are not as well-protected against inflation as some might think.

It's true that Social Security benefits are eligible for an annual cost-of-living adjustment, or COLA. But the program's COLAs have not done a good job of helping seniors keep up with their costs. And if lawmakers don't address the issue soon, Social Security recipients could continue to struggle financially.

Why Social Security benefits keep losing buying power

A recent report from the Senior Citizens League, an advocacy group, highlighted just how poor a job Social Security's COLAs have done in recent years. It found that over the past decade, Social Security benefits lost an astounding 13.7% of their buying power. And the reason largely boils down to a flawed COLA formula.

Social Security COLAs are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), an inflation measure that tracks spending among wage earners. But people who are still in the workforce tend to spend their money very differently from Social Security recipients who, by nature, tend to be retirees.

If you're retired, you probably don't have the same set of expenses you did when you were working. You may not have nearly the same transportation costs, and Medicare premiums, prescription drugs, and other healthcare-related expenses may now take up a larger share of your income.

The problem is that healthcare isn't a very influential factor in the CPI-W. And healthcare costs have also been outpacing inflation broadly. This explains why Social Security COLAs have not been making it possible for seniors to keep up with their costs.

Some advocates are pushing for a change

Many retirement advocates argue that lawmakers should use the Consumer Price Index for the Elderly (CPI-E) to calculate Social Security COLAs rather than the CPI-W. The CPI-E is an inflation index developed by the Bureau of Labor Statistics (BLS) that tracks spending patterns for households with people age 62 and older. Because it places greater weight on categories like healthcare, it generally reflects the expenses retirees are more likely to face.

Supporters say switching to CPI-E would produce COLAs that better match the real-world inflation older Americans experience, helping preserve the buying power of Social Security benefits over time. But there's been hesitation to adopt it.

A big reason is that the BLS classifies the CPI-E as experimental because it relies on the same underlying price data as other CPI indexes but uses a smaller subset of households and has not been expanded into a fully developed official index. Policymakers have also expressed concerns about the long-term cost of larger COLAs if CPI-E data consistently shows higher inflation than the CPI-W.

As it is, Social Security is facing a funding shortfall that could result in broad benefit cuts in roughly six years. Increasing COLAs could further strain the system, which is perhaps why lawmakers haven't prioritized a new formula.

Take steps to beat inflation

It's hard to say if and when lawmakers will address the issue of insufficient COLAs. Their focus in the near term may be preventing benefit cuts, which means the current CPI-W formula could remain in place for the foreseeable future.

If you're someone who collects Social Security, it's important to recognize that your benefits may not keep up with inflation despite being designed to do so. The good news, though, is that you can take steps on your own to maintain your buying power.

One way to help protect your purchasing power is to invest part of your retirement savings in assets that have historically outpaced inflation, such as diversified stock funds or dividend-focused exchange-traded funds (ETFs). It's also worth reviewing your budget regularly and looking for opportunities to cut discretionary spending when inflation is running hot.

While you can't control prices, taking steps to manage your investments and expenses could help your retirement income go further over time.

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