Why You Can’t Depend on Social Security COLA Increases in Retirement – Here’s What You Can Do Instead

Millions of retirees relying on Social Security for their income are facing a disappointing reality: the 2025 cost of living adjustment (COLA) is expected to be lower than what many hoped for. With an increase of only 2.5%, this adjustment may not be enough to keep up with the rising cost of essential goods and services. Social Security is designed to protect against inflation, but its current formula doesn’t always reflect the true challenges faced by seniors, especially when it comes to healthcare expenses. Let’s look into why this happens and what retirees can do to safeguard their financial future.

How COLA Works

The Social Security Administration (SSA) adjusts benefits annually to account for inflation, using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate the COLA. In theory, this adjustment helps Social Security recipients maintain their purchasing power. However, the CPI-W is based on the spending habits of wage earners and workers, not retirees. This can result in a mismatch between the real-world inflation retirees experience—especially in areas like healthcare—and the inflation reflected in the COLA increase.

Problem with the CPI-W

One major issue with using the CPI-W to calculate Social Security COLA is that it doesn’t accurately reflect the spending patterns of retirees. For example, workers may spend more on items like transportation or clothing, while retirees typically allocate a larger portion of their income to healthcare. As healthcare costs rise faster than other expenses, many seniors find that their buying power shrinks despite receiving COLA increases.

Healthcare Costs

Imagine you’re a retiree who spends a significant portion of your income on healthcare services. If healthcare costs increase by 10% in a year, but your Social Security COLA only rises by 2.5%, you’re losing money in real terms. Over time, this gap can lead to a serious erosion of purchasing power. According to The Senior Citizens League, retirees have lost over 20% of their purchasing power since 2010 due to the failure of COLA to keep pace with inflation.

The Bigger Picture

The situation gets worse when you look at the longer-term trend. Another report from The Senior Citizens League claims that Social Security has lost 36% of its buying power since the year 2000. This means that for every dollar Social Security paid out at the turn of the century, seniors now only receive the equivalent of 64 cents in terms of purchasing power. With rising costs for housing, food, and healthcare, relying solely on Social Security is not enough to maintain a comfortable retirement lifestyle.

Strategies

With COLA increases not keeping up with inflation, it’s essential for retirees to adopt strategies that diversify their income sources and protect their financial stability. Here are some key tips to help reduce reliance on Social Security:

1. Start Saving Early

The most effective way to secure a stable retirement is to begin saving as early as possible. Retirement savings accounts like IRAs, Roth IRAs, and 401(k)s provide tax advantages and growth opportunities that can outpace inflation. The earlier you start contributing, the more time your money has to grow, allowing you to rely less on Social Security in retirement.

2. Maximize Contributions

As you advance in your career and begin to earn more, it’s important to increase your contributions to retirement accounts. Many workers start at lower wages and gradually see their earnings increase through promotions and raises. Every time you receive a raise, consider putting a portion of it toward your retirement accounts. This ensures you are building a solid financial cushion for the future.

3. Diversify Your Investments

Relying on one income source is risky, especially in retirement. You’ve likely heard the saying, “Don’t put all your eggs in one basket.” This applies to retirement planning too. Diversify your investments into stocks, bonds, mutual funds, real estate, and passive income streams. Each of these options can provide growth, income, and security in different economic conditions.

4. Delay Social Security Benefits

If possible, delay claiming Social Security until you turn 70. This can boost your monthly benefit by up to 8% per year after your full retirement age (usually 66 or 67). The longer you wait, the higher your payments, which can help offset smaller COLA increases in the future.

5. Create a Budget

Sticking to a monthly budget can help you manage your expenses more effectively. By prioritizing your spending and cutting unnecessary costs, you’ll be better prepared to handle a smaller COLA increase. Additionally, paying off debt—especially high-interest debt—can free up more income for retirement savings and reduce the burden of interest payments.

6. Build an Emergency Fund

Unexpected expenses can derail your retirement plans, so it’s essential to have an emergency fund. Aim to save enough to cover 3-6 months of living expenses in a liquid, easily accessible account. This will protect you from having to dip into your retirement savings when the unexpected happens.

7. Plan for Healthcare Costs

Healthcare is one of the biggest expenses in retirement, and it’s only going to increase as you age. Make sure you plan ahead for these costs by considering Medicare supplement plans or long-term care insurance. Additionally, saving in a Health Savings Account (HSA) during your working years can help cover future medical costs in retirement.

With the lower-than-expected COLA increase in 2025, many retirees may find themselves struggling to maintain their buying power. While Social Security is an essential part of retirement income, it was never meant to be the sole source of financial support. By saving early, diversifying investments, and planning ahead, retirees can take control of their financial futures and reduce their reliance on COLA increases.

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