Don’t Believe These 2 Myths About Social Security’s Cost of Living Adjustment

Most retirees who collect Social Security are aware that Cost of Living Adjustments are built into the benefits program and occur during most years. However, while seniors are usually aware of COLAs, they may not know the truth about them.

In fact, there are two common myths many people buy into, potentially to their financial detriment. Here are the two big misconceptions that far too many seniors harbor, along with some tips on what to do when you come to terms with the reality. 

Myth 1: COLAs maintain your buying power

The first big myth about Cost of Living Adjustments is that they’ll help you maintain buying power if you are a senior collecting Social Security. The reality is that COLAs are designed to do that, but they fail in the execution as a result of a problem with the COLA formula.

COLAs are supposed to help retirees maintain buying power as inflation causes prices to rise. However, the way COLAs are calculated involves comparing the year-over-year changes to a pricing index called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W data from the third quarter of 2025 will be compared with data from the third quarter of 2024, and the COLA for 2026 will be based on the average increase. 

The consumer price index looks at how much costs have risen on a basket of goods and services, but that basket is based on the spending habits of urban wage earners and clerical workers. Seniors don’t spend like this group does. Retirees tend to spend a lot larger share of their income on healthcare, which sees price surges in most years that far outpace inflation in other categories. Retirees also tend to spend more on other areas where prices rise faster than inflation, such as housing.

Thanks to this flawed formula, cost-of-living adjustments are usually too small. The result is that benefits have lost 20% of their buying power since 2010, according to the Senior Citizens League. That’s a big erosion in the value of benefits, and it is something many retirees may not even really realize is happening if they buy into the myth that COLAs provide real and meaningful protection against inflation.  

Retirees need to be aware that they are probably losing ground, so they can adjust their budgets accordingly and not withdraw too much money from their retirement accounts too quickly. 

Myth 2: COLAs are a raise

The next myth that many retirees end up buying into is that Cost of Living Adjustments are a raise. In fact, you’ll often hear a COLA described as a “Social Security raise.” It isn’t really a raise,  though. Raises usually increase your buying power and give you more money to spend. COLAs don’t do that. At best, they help you to maintain your buying power and avoid losing ground, and, as mentioned above, they don’t even really do that very well.

Understanding this reality is really important because retirees need to be aware that a large Cost of Living Adjustment is not a good thing and doesn’t give them extra funds they can use to enhance their lifestyle. A big “raise” in this context means that inflation is higher than normal, so retirees may need to tighten their belts to avoid spending more than they should during a time when prices are going up. 

A financial advisor can provide help to retirees in understanding what the COLA means to them, as well as help in adjusting their budgets to cope with inflation while making sure to maintain a safe withdrawal rate from retirement accounts so their funds last as long as they need them to.