Does Social Security cheat you out of inflation raises?

I had a retirement planning meeting with a client the other day. It went well, the results were solid improvements from a few ROTH conversions, a reduction in portfolio risk, and Social Security maximization.

While on the topic of Social Security, they asked “are Social Security cost of living raises estimated too high?”


Will your Social Security payments keep up with inflation?

In our financial planning programs, we assume an inflation rate going back to 1970 of 4.22%. That’s measured by the Consumer Price Index.

For planning purposes, we assume the cost of goods and services will rise at that rate through the rest of our lifetimes. We also assume Social Security cost of living raises will rise at the same rate.

If you or someone you know is taking Social Security benefits currently, you’re well aware that the recent raises most certainly haven’t been 4.22%. They were something FAR LESS!


Why isn’t Social Security giving a COLA raise?

There’s a good reason Social Security will be giving little – if any – increase this year. The fact is inflation in the last few years has been incredibly low. So low, most retirement income clients haven’t even taken a cost of living raise in a few years! They simply haven’t needed to do so.

So I got to thinking “how do Social Security cost of living allowances compare to actual inflationary pressures?” In all honesty it’s a scary thought!

What if Social Security inflation raises are far less than inflation? That would certainly hurt our retirement income clients.

Anywhere from a quarter – to a half – of most retirees income usually comes from Social Security at some point in their retirement. Assuming a Social Security cost of living increase too high could potentially cause serious problems with their retirement plans we create. Assuming Social Security cost of living inflation raises too low might be the conservative route, but our clients might not enjoy retirement as much as they otherwise could be!

Getting it as close to actual is the most prudent retirement planning course of action.


Have Social Security inflation raises kept up with inflation?

We did some digging. We compared actual Social Security cost of living raises with actual economic inflation.

After all, we want those two numbers to be relatively close over 5 and 10 year periods.

Here’s what we found out (click to enlarge):

Surprisingly, Social Security COLA inflation raises are nearly identical to actual inflation

Social Security benefits have enjoyed increases on par with long term inflation rates.


The actual inflation data is here, and the Social Security cost of living adjustment data is here.

Needless to say, everything is relative in this chart (within a small margin). Higher inflationary periods dictate a higher Social Security cost of living raise, and the opposite is true as well.


And the results are…

Overall the difference between actual inflation and the Social Security adjustment is negligible – 6 basis points to be exact. The good news is our planning inflationary raises at historical inflationary rates is not only prudent, but appropriate.

Make sure you’re estimated Social Security income and inflation as accurately as possible. Even small miscalculations can have disastrous consequences!