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Can Social Security Benefits Keep Up With Inflation?

Cost-of-living increases help in the long term, but the short term is another story

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Inflation has been raging for more than a year, pushing up prices on everything from steak to gasoline. For retirees worried about paying soaring bills, a big question is whether their Social Security benefits will be able to keep up with inflation.

The short answer: Probably. Social Security’s annual cost-of-living adjustment (COLA) has kept up well with inflation the past 20 years, according to the Center for Retirement Research at Boston College. But despite the 5.9 percent COLA that went into effect in January, the biggest in four decades, many beneficiaries have still lost buying power to this year’s inflation burst, thanks in part to the large increase in Medicare Part B premiums.​

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Annual adjustments

​When the first Social Security check was issued in 1940, the payments were fixed: The amount of your benefit didn’t change from year to year unless Congress authorized a raise. In 1973, however, the Organization of Petroleum Exporters (OPEC) declared an oil embargo on the United States and other countries, which sent gas prices through the roof and touched off a spike in inflation. The Consumer Price Index (CPI), the government’s main gauge of inflation, rose 6.2 percent in 1973 and 11.1 percent in 1974, sharply reducing the buying power of a Social Security payment. In response, Congress authorized automatic COLAs, which adjust Social Security benefits for inflation each year. The first automatic COLA, in 1975, was 8 percent.​

​The formula for calculating the COLA is based on a subset of the main CPI called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the price changes in a basket of goods. The Social Security Administration (SSA) looks at the average CPI-W level from July through September of the previous year and the average CPI-W for the same span in the current year. The percentage change between the two averages is the COLA that kicks in the following year. ​

​Until recently, inflation has been tame. COLAs averaged 2.1 percent from 2001 through 2021. There was no COLA at all in 2009, 2010 and 2015 because inflation levels didn’t increase year over year. But by the spring of 2021, inflation had begun to resurface, and SSA announced a 5.9 percent COLA for benefits paid in 2022. It was the largest COLA since 1982’s 7.4 percent increase. The 2023 COLA could be even larger. “A rough guesstimate now might be around 8 percent,” says Stephen Goss, chief actuary for SSA. “It could be a percentage point or two higher or lower than that.”​

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Still behind in the short term ...

​The big 2022 COLA didn’t completely cover this year’s increase in inflation. The CPI-W rose 7.9 percent in 2021. Inflation has burned even hotter in 2022, jumping 8.9 percent in the 12 months ended in April and making the 5.9 percent Social Security COLA look small in comparison. ​

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​Some categories that are most important to older adults have risen the most. The price of gasoline, for example, jumped 30.3 percent in the 12 months ended in April, and food rose 9.4 percent. Medical services, however, rose just 3.5 percent.​

Furthermore, the basic Medicare Part B premium, typically deducted directly from Social Security benefits, jumped to $170.10 a month from $148.50 in 2021, a 14.5 percent increase. A big chunk of the 2022 Part B premium increase was tied to anticipated spending on a pricey new Alzheimer’s drug, Aduhelm. However, after Medicare announced the premium hike, the price tag for Aduhelm was cut in half by the drug’s maker. Medicare plans to pass along any savings on drug spending this year to Part B beneficiaries in 2023.​

... but keeping up with inflation in the long term

Over time, however, Social Security COLAs have kept up with inflation well, says Alicia Munnell, director of the Center for Retirement Research at Boston College. The COLA lags inflation when prices are rising, but it lags when inflation is moderating, too. Unlike gas prices, which are quick to rise and slow to fall, Social Security payments are slow to rise and slow to fall, too. Over the course of an inflationary period, the COLA tracks inflation fairly well. In the past 20 years, the Social Security COLA has averaged a 2.1 percent annual gain while the CPI has risen an average of 2.2 percent.

​“The annual Social Security adjustments do a really good job of offsetting the effects of inflation,” Munnell says.

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The Social Security COLA is critical to the financial income security of seniors, says AARP, and that is why it has fought so hard against repeated efforts to cut the COLA. Without the COLA, seniors would see their benefits erode over time, and they would fall further and further behind. The COLA is a virtual lifeline for seniors, and that is especially true in periods of high inflation.​​

John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and  USA Today and has written books on investing and the 2008 financial crisis. Waggoner's  USA Today investing column ran in dozens of newspapers for 25 years.

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