Cost-of-living adjustments, which are linked to the Consumer Price Index, have been a part of Social Security since 1972 but a closer looked shows the system doesn't always work.
By increasing benefits in accordance with the CPI, Social Security payments should theoretically keep up with inflation and provide seniors with the same purchasing power every year. However, the reality is that it does not work that way. In fact, seniors have seen a decrease of 31% of their purchasing power since 2000.
This was the topic of recent My San Antonio article titled "Will Social Security Keep Up With Inflation?"
The problem is that the Consumer Price Index uses a broad range of goods and services to determine the change in cost of living from year to year. Seniors, however, are not equally affected by everything that is measured in the index.
For example, falling gas prices have recently led the CPI to indicate that Social Security benefits should not get an annual increase. Retirees who no longer need to commute to work are not as helped by falling gas prices as much as other demographic groups. Instead, retirees are more affected by the rising costs of health care and prescription medications.
The net effect is that since the year 2000 seniors' living expenses have increased by 84% while Social Security benefits have only increased by 41%.
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Reference: My San Antonio (March 27, 2016) "Will Social Security Keep Up With Inflation?"