Social Security provides a vital source of income for more than 53 million retirees nationwide, many of whom depend on this benefit to cover essential living expenses. Surveys conducted over 24 years by Gallup highlight that between 80% and 90% of retirees rely on Social Security payments to some extent to meet their financial needs, making the annual cost-of-living adjustment (COLA) announcement a critical event for these individuals.
The COLA is designed to counterbalance the effects of inflation by increasing benefits to preserve the purchasing power of beneficiaries. For example, if the overall cost of a representative basket of goods and services typically purchased by seniors rises by 3% in a year, the Social Security COLA should ideally increase monthly benefits by a similar amount to prevent a decline in real income.
Prior to 1975, adjustments to Social Security benefits were inconsistent and determined by special congressional sessions, resulting in irregular increases. A notable example was in 1950 when the benefit increase reached 77%, the highest on record. To bring more regularity and objectivity, the government adopted the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as the standard measure for calculating COLA starting in 1975.
The CPI-W includes over 200 spending categories with specific weightings, providing a single figure to compare price changes month-to-month and year-over-year. The Social Security Administration calculates the COLA based on the year-over-year change in the average CPI-W for the third quarter (July through September). When the U.S. Bureau of Labor Statistics releases September inflation data in mid-October, this completes the calculation for the upcoming year's COLA increase.
If the average CPI-W over the most recent third quarter surpasses that of the previous year, beneficiaries receive a corresponding increase in their monthly checks equal to the percentage change, rounded to the nearest tenth of a percent.
Despite the structured approach, the use of CPI-W as the underlying inflation measure has an intrinsic shortcoming, especially for seniors heavily dependent on Social Security benefits. The index tracks the spending habits and price changes affecting urban wage earners and clerical workers, groups primarily consisting of working-age Americans with different consumption patterns than retirees.
As of December 2024, 87% of Social Security beneficiaries, including retired workers, survivors, and disabled workers, were aged 62 or older. The COLA calculation, however, reflects price changes experienced by a demographically distinct group whose expenditures vary significantly from seniors'. In particular, retirees allocate a larger portion of their budgets to shelter and medical care services — categories that may price-shift differently than those heavily weighted in the CPI-W.
The consequence of this mismatch has been a consistent shortfall in the COLA’s ability to keep pace with the true cost increases faced by seniors. A report from The Senior Citizens League, a nonpartisan advocacy group, found that the real purchasing power of Social Security benefits declined by around 20% from 2010 to 2024, signaling that benefits are not rising fast enough to cover seniors’ actual expenses.
Recognition of the CPI-W’s limitations transcends partisan lines in Congress, yet political divisions have stalled efforts to reform the measure. Amending the Social Security Act to adjust the inflation index requires 60 votes in the Senate — a supermajority threshold unattained for decades and compounded by a long-standing partisan impasse on Social Security reforms.
Democratic lawmakers generally support transitioning to the Consumer Price Index for the Elderly (CPI-E), which better represents inflation faced by households with seniors aged 62 and above, by emphasizing categories crucial to retirees’ cost profiles.
Conversely, Republican proposals favor adopting the Chained Consumer Price Index (Chained CPI), an index that accounts for consumer substitution — the phenomenon where individuals switch to less expensive alternatives when prices rise.
Until a bipartisan consensus is reached, the CPI-W’s inherent flaws will likely continue eroding Social Security beneficiaries’ purchasing power, particularly those most reliant on its income. This enduring gap places at risk the financial stability of millions of retirees and underlines the urgent need for reform.