I’m Not Counting on Social Security COLAs to Carry Me Through Retirement. Here’s What I’m Doing to Combat Inflation Instead.

If you’re stressing out about your future retirement because the idea of a fixed income is scary, know that you’re not likely to be living on a totally fixed income — most of us are scheduled to start collecting Social Security benefits in the future, and those benefits get nearly annual cost-of-living adjustments (COLAs).

COLAs are great, and I’d much rather receive them than not, but I’m not counting on them keeping me afloat throughout my retirement. Here’s why.

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Meet Social Security’s COLAs

Almost every year features a Social Security increase, because most years are marked by some degree of inflation. The COLA for 2025 was smaller than many people had hoped, at 2.5%. So anyone collecting, say, $2,000 per month in 2024 could look forward to $2,050 per month in 2025. (Not surprisingly, a Motley Fool survey found 54% of respondents saw the 2.5% bump as insufficient, with 31% calling it “completely insufficient.”)

Still, the 2.5% COLA is actually not far off from the 2.6% average annual increase over the past 20 years. Here are some recent Social Security COLAs:

Data source: Social Security Administration.

Yes, we had some hefty hikes a few years ago, but those were because inflation was quite high then — and most years have featured much lower inflation and corresponding COLAs.

There’s a problem with Social Security’s COLAs

One reason I’m disappointed in Social Security’s COLAs myself is this: They’re based on a suboptimal inflation measure — the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That index, calculated by the Bureau of Labor Statistics, is based on changes in the average prices of costs borne by workers — not retirees.

A better measure for calculating Social Security COLAs is the Consumer Price Index for the Elderly (CPI-E), which weighs categories such as healthcare and housing more heavily. Using this measure would make more sense for retirees, as they tend to face more healthcare costs, which have risen sharply in recent decades.

But these days, Social Security has bigger problems than the accuracy of its COLAs.

The Social Security surplus is turning into a shortfall

For decades, Social Security took in more from taxes on workers’ wages than it paid out to beneficiaries. But people are living longer these days, and many are retiring earlier, so the ratio of cash inflows to outflows has been shrinking.

If nothing is done to strengthen Social Security, its trustees estimate that beginning in 2035, beneficiaries will receive only 83% of what they’re due. Yikes. Fortunately, there are multiple ways to fix this problem. More than a few have had bipartisan support, too.

President Trump’s administration may shrink Social Security

Then there’s our new president, who has announced some ideas for changing Social Security and may have other changes in store, too. For starters, he has proposed eliminating the tax on Social Security benefits received. That would let many seniors keep more of their money, which is clearly a welcome thing.

But if Social Security thereby takes in less money, its surplus will get wiped out even sooner than 2035, at which point all benefits may be reduced significantly. So an up-front plus can turn into an eventual minus.

I’m actually worrying more about a future reduction in benefits than in the annual COLA not offering quite as much inflation relief as it should.

Here’s how I’m planning for Social Security in my retirement

Given all these scenarios, here’s how I’m planning for my retirement, taking Social Security and inflation into account. You might want to take similar actions:

• Since I’m not yet retired, I’m hoping to increase my future benefits as much as I can. Studies have shown that millions can maximize their total benefits by delaying filing for Social Security until age 70 — though now with a shortfall possibly happening sooner, I’m questioning that strategy.
• I’ve also set up a my Social Security account at the Social Security Administration (SSA) website, so that I can get a good sense of how much I can expect to receive. Each of us should take this step.
• My own retirement is within a decade, so I’ve been working on having more dividend-paying stocks in my portfolio. Dividends are wonderful because they tend to increase over time — often outpacing inflation. I’ve bought shares of some individual companies and also a few dividend-focused exchange-traded funds (ETFs).
• I’m working on a household spending budget for retirement, so that I can live within my means.
• I’m thinking about buying one or more fixed annuities before retiring. Doing so will generate a fairly reliable income stream. Note that when interest rates are higher, insurers will offer bigger payouts, and rates are still relatively higher than they’ve been over the past decade or two.
• I’m aiming to delay retirement for a few years, perhaps starting Social Security at age 70. That will help me build my nest egg a little more before retiring, too. Since I’m married, though, it might be that my spouse delays until age 70 and I start earlier, in order to bring in some income.

Don’t leave your retirement largely up to chance. Be sure you have a solid retirement plan in place. You’ll need to estimate how much income you’ll need in retirement and how you’ll get it. It can be especially smart to set up multiple income streams for your retirement, too. Social Security can be one of those streams, but should it end up disappointing, we would do well to have other dollars flowing in.

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