Aberrant lineage specification of skeletal stem cells (SSCs) contributes to reduced bone mass and increased marrow adipose tissue (MAT) in osteoporosis and skeletal aging. Although master regulators of osteoblastic and adipogenic lineages have been identified, little is known about factors that are associated with MAT accumulation and osteoporotic bone loss. Here, we identify peroxisome-proliferator-activated receptor γ coactivator 1-α (PGC-1α) as a critical switch of cell fate decisions whose expression decreases with aging in human and mouse SSCs. Loss of PGC-1α promoted adipogenic differentiation of murine SSCs at the expense of osteoblastic differentiation. Deletion of PGC-1α in SSCs impaired bone formation and indirectly promoted bone resorption while enhancing MAT accumulation. Conversely, induction of PGC-1α attenuated osteoporotic bone loss and MAT accumulation. Mechanistically, PGC-1α maintains bone and fat balance by inducing TAZ. Our results suggest that PGC-1α is a potentially important therapeutic target in the treatment of osteoporosis and skeletal aging.