How Inflation Affects Your Social Security Benefits: AWI and COLA Explained
Published: 11/23/2018 · Updated: 1/21/2026
Key Takeaways
- Social Security has two different inflation protections that apply at different times in your life
- Wage indexing (AWI) adjusts your earnings during your working years to reflect wage growth
- COLA increases your benefit each year after you start collecting to keep pace with prices
- Benefit estimates are shown in "today's dollars" so you can compare to your current expenses
How Social Security Protects Against Inflation
Inflation reduces the purchasing power of money over time. A dollar today buys less than a dollar did 20 years ago. Social Security is designed to account for this through two separate mechanisms:
- Wage indexing during your working years (before you collect)
- Cost of Living Adjustments (COLA) after you start receiving benefits
The result is that your benefit maintains its purchasing power both during the decades you work and during the decades you collect.
Wage Indexing (AWI) — During Your Working Years
When Social Security calculates your benefit, it doesn't simply add up your lifetime earnings. Instead, it adjusts your historical earnings using the Average Wage Index (AWI).
The AWI measures how much average wages have grown over time. If average wages doubled between 1995 and 2025, then $30,000 earned in 1995 would be adjusted to $60,000 for benefit calculation purposes.
Wage Indexing in Action
Consider this simplified earnings record for someone who turned 60 in 2024:
| Year | Age | Taxed Earnings | Multiplier | Indexed Earnings | |||
|---|---|---|---|---|---|---|---|
| 2013 | 27 | $40,000 | × | 1.56 | = | $62,241 | |
| 2014 | 28 | $41,000 | × | 1.50 | = | $61,610 | |
| 2015 | 29 | $42,025 | × | 1.45 | = | $61,027 | |
| 2016 | 30 | $43,076 | × | 1.44 | = | $61,854 | |
| 2017 | 31 | $44,153 | × | 1.39 | = | $61,284 | |
| 2018 | 32 | $45,256 | × | 1.34 | = | $60,618 | |
| 2019 | 33 | $46,388 | × | 1.29 | = | $59,890 | |
| 2020 | 34 | $47,547 | × | 1.26 | = | $59,699 | |
| 2021 | 35 | $48,736 | × | 1.15 | = | $56,195 | |
| 2022 | 36 | $49,955 | × | 1.09 | = | $54,694 | |
| 2023 | 37 | $51,203 | × | 1.05 | = | $53,681 | |
| 2024 | 38 | $52,483 | × | 1.00 | = | $52,483 | |
| 2025 | 39 | $53,796 | × | 1.00 | = | $53,796 | |
Notice how the 2013 earnings of $40,000 have a multiplier of 1.56, making them worth $62,241 in indexed terms. This reflects approximately 56% wage growth between 2013 and 2024.
This indexing process ensures that your early-career earnings are credited fairly. Someone who earned $30,000 in 1985 shouldn't have those earnings count the same as $30,000 today—the 1985 earnings should be adjusted up to reflect wage growth.
When does wage indexing stop? Your earnings are indexed using the AWI from the year you turn 60. After that, any additional earnings are counted at face value with no indexing adjustment. For more details, see our Wage Indexing Guide.
COLA — After You Start Collecting Benefits
Once you begin receiving Social Security benefits, wage indexing no longer applies. Instead, your benefit is protected by annual Cost of Living Adjustments (COLA).
Each year, Social Security increases benefits based on the Consumer Price Index for Urban Wage Earners (CPI-W). If consumer prices rise 3% in a year, benefits increase by 3% the following January.
COLA can never be negative. Even if prices decrease (deflation), your benefit stays the same rather than decreasing. This one-way protection ensures your benefit never loses ground.
AWI vs. COLA: Key Differences
While both protect against inflation, AWI and COLA work differently and serve different purposes:
| Wage Indexing (AWI) | COLA | |
|---|---|---|
| When it applies | During your working years (until age 60) | After you start receiving benefits |
| What it measures | Wage growth (how much workers earn) | Price inflation (how much things cost) |
| What it adjusts | Your historical earnings record | Your monthly benefit amount |
| Index used | Average Wage Index (AWI) | Consumer Price Index (CPI-W) |
How This Affects Your Benefit Estimate
When you use this Social Security calculator or receive a benefit estimate from the Social Security Administration, the amounts are shown in "today's dollars."
What "Today's Dollars" Means
If this calculator estimates your benefit at $2,000 per month starting in 15 years, and there's 50% cumulative inflation during that time:
- Your actual monthly payment will be approximately $3,000
- But $3,000 in 15 years will buy about the same as $2,000 does today
- The estimate shows you the real purchasing power you can expect
Future COLA increases aren't included in estimates because the actual adjustment amounts won't be known until they're announced each year. By showing estimates in today's dollars, you can compare your expected benefit directly to your current income and expenses.
Common Questions
Are Social Security benefits adjusted for inflation?
Yes, Social Security has two inflation protections. During your working years, your earnings are adjusted using wage indexing (AWI) to account for wage growth. After you start receiving benefits, annual Cost of Living Adjustments (COLA) increase your benefit based on consumer price inflation.
What is COLA and when does it apply?
COLA stands for Cost of Living Adjustment. It's an annual increase to your Social Security benefit based on the Consumer Price Index (CPI-W). COLA is applied starting the January after you begin receiving benefits, and continues every year thereafter.
Why is my estimated benefit shown in 'today's dollars'?
Benefit estimates are shown in today's dollars so you can compare them directly to your current income and expenses. The actual dollar amount you receive will be higher due to inflation adjustments, but the purchasing power will be approximately the same as the estimate shows today.
What is the difference between AWI and COLA?
AWI (Average Wage Index) adjusts your historical earnings during your working years to account for wage growth. COLA (Cost of Living Adjustment) increases your benefit amount after you start collecting to keep pace with consumer price inflation. AWI is based on wage growth; COLA is based on price inflation.
Can my Social Security benefit ever decrease due to inflation?
No. By law, COLA can never be negative. In years when prices decrease (deflation), your benefit stays the same rather than decreasing. This protects your purchasing power even in unusual economic conditions.
Related Guides
- Wage Indexing Guide — Detailed explanation of how indexing factors are calculated and why they matter
- AIME Guide — How your indexed earnings are averaged to calculate your benefit base
- Primary Insurance Amount (PIA) — How your AIME is converted to your monthly benefit
- Earnings Cap — The maximum earnings subject to Social Security tax and benefit calculations
Use the SSA.tools calculator to see how your actual earnings—adjusted for inflation—translate into your estimated benefit.
Additional Resources
- Cost of Living Adjustment Information [ssa.gov]
- Consumer Price Index (CPI-W) [ssa.gov]
- National Average Wage Index [ssa.gov]
- COLA History Since 1975 [ssa.gov]