COLA: How Can it be a Raise if we lose Buying Power? - Motley Fool
Inflation is an insidious thing. The rising cost of consumer goods takes its toll on our budget nearly every year, meaning we lose buying power almost daily (our dollar buys less as prices go up). “COLA,” or Cost of Living Adjustment, is how seniors dependent on Social Security try to catch up with inflation, an impossible task because COLA is awarded after-the-fact.
The amount of COLA applied to your Social Security benefit each year depends on past changes to the Consumer Price Index (CPI); specifically the CPI-W which measures inflation for all urban wage earners and clerical workers. Arguably, the CPI-W may not be a good inflation measure for seniors because it tracks spending for working Americans instead of older retired persons. Also, the rising cost of Medicare premiums, which are deducted from your Social Security check, offsets at least a portion of any COLA increase to your Social Security benefit. And all of this translates to senior citizens continuing to lose buying power, even in the face of the big COLA increases of the last few years.
This Motley Fool article by Christy Bieber explains.