Suppose you are a Social Security recipient. In 2006 you receive $600 per month in Social Security benefits. In October of that year, the Social Security Administration announces that the cost-of-living adjustment for 2007 will be 3.3 percent, roughly matching the overall inflation rate.
a. How much will your 2007 monthly benefit be?
b. In real terms, do your benefits go up, go down, or stay the same?

a. How much will your 2007 monthly benefit be?

$600 x 103.3% = $619.80

b. In real terms, do your benefits go up, go down, or stay the same?

Benefits will stay the same because in real terms the adjustment will only match the inflation rate. There is no real increase in the purchasing power of the money received. Inflation decreases the purchasing power of the currency, that means that $100 today buys less than $100 a year ago. If the adjustment only covers the inflation rate, there is no real gain but at least there is no real loss either.