Social Security COLA 'Flaw' Explained

Social Security recipients have lost more than $1,700 in retirement benefits due to the way cost-of-living adjustments (COLA) are calculated, a financial expert has said.

In 2024, Social Security benefits increased by 3.2 percent. In 2023, a historic rise of 8.7 percent was granted to retirees and other benefit claimants due to high inflation following the coronavirus pandemic.

But despite consistent increases over the last decade, one expert has argued that the method for calculating Social Security means seniors have actually lost purchasing power, even though there has been a nearly 30 percent overall increase to retirement benefits.

In an April 28 article for financial advice website Motley Fool, author Trevor Jennewine pointed out that retirees have missed out on $1,756 due to COLA being calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

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The yearly COLA is made by comparing the average CPI-W from monthly reports in July, August, and September—the third quarter—of the current fiscal year to the average for the same months of previous year.

But due to the calculation not accounting for "the most aggressive increases in consumer prices," Jennewine argues that America's oldest generations have actually seen their state benefits lose buying power.

Over the 10 years since 2014, COLA increases have raised retirement benefits by 28.6 percent, while consumer prices have risen by 30.4 percent, meaning retirees have missed out on an additional 2 percent rise.

Jennewine explains that this is because COLA is calculated using CPI-W third-quarter data. However, the CPI-W increased most sharply in the first or second quarters of 2014, 2017, 2018, 2019, 2020, 2022 and 2023—meaning that "did not account for the most aggressive increases in consumer prices."

"As a result, CPI-W inflation increased more quickly than COLAs over the last decade, meaning Social Security benefits (arguably) lost buying power," Jennewine wrote.

"The COLA calculation is flawed because it extrapolates third-quarter CPI-W data to the full year. That only works if CPI-W inflation rises and falls smoothly over long periods, such that any discrepancies between the annual change in CPI-W and Social Security COLAs average out over time.

"By law, the COLA is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers from the third quarter of the last year," the Social Security Administration told Newsweek after being queried about the finding. "The CPI-W is determined by the Bureau of Labor Statistics in the Department of Labor."

The loss of purchasing power is "tangible" for many retirees, Michael Hills, financial adviser at Apex Wealth, told Newsweek.

"The estimated shortfall of $1,756 over the past decade may not appear overwhelming at a glance, but for many seniors, this amount could affect their quality of life, not to mention I doubt anybody would turn it down," he said. "This shortfall underscores the importance of ensuring that Social Security adjustments are closely aligned with actual cost-of-living increases.

"Addressing this mismatch is crucial not only for rectifying income disparities among retired individuals, but also for fortifying the financial security that Social Security aims to provide."

On the upcoming rise in 2025—currently expected to be around 2.6 percent, according to the Senior Citizen's League—experts have previously told Newsweek that the increase is unlikely to improve the finances of seniors who rely on Social Security benefits.

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"I'm just not sure that's going to be enough," Michael Ryan, a financial expert and founder of michaelryanmoney.com, told Newsweek. "Seniors are already struggling to afford basic necessities like healthcare, food, and housing. This increase may provide some relief, but I worry it still won't fully protect their purchasing power."