For most of the 53.1 million retired workers who got a Social Security check in June, that payment is crucial. The average monthly benefit for retired workers is $2,005. This amount is modest. However, nearly 80% to 90% of retirees rely on it to cover their living expenses. Gallup’s annual surveys over nearly 25 years show this clear trend.
For these retirees, nothing holds more significance than understanding how much they’ll receive each month. People eagerly await the Social Security Administration’s (SSA) annual cost-of-living adjustment (COLA) announcement in October.
While there is a realistic chance that Social Security’s 2026 COLA will achieve something not seen in nearly three decades, the harsh reality remains that it still represents a no-win scenario for retirees.
The Crucial Role of Social Security’s Annual COLA
Before diving deeper into the topic, it’s essential to understand the fundamental purpose of Social Security’s cost-of-living adjustment (COLA) and the method behind its calculation.
Why Social Security’s COLA Matters
Each year, the prices of goods and services that retirees frequently purchase tend to fluctuate. For instance, if the overall cost of a wide range of goods and services rises by 2.5% from one year to the next, Social Security benefits must increase by the same percentage to maintain retirees’ purchasing power. The annual COLA acts as a “raise” to counteract inflation and preserve buying power.
The Evolution of COLA Calculations
Before 1975, there was no standardized formula for calculating COLAs. In fact, only 11 adjustments were enacted through special sessions of Congress over a span of 35 years. Among these, the most significant increase occurred in 1950, with benefits skyrocketing by 77%!
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the key metric for measuring inflation within the program. With over 200 individually weighted cost categories, the CPI-W is distilled into a single figure each month. This simplification allows for straightforward year-over-year comparisons, helping to determine if there is an overall increase in prices, known as inflation, or a decrease, referred to as deflation.
Understanding the Role of CPI-W in Social Security’s COLA
When it comes to calculating the Cost of Living Adjustment (COLA) for Social Security, only the CPI-W readings from July, August, and September—the third quarter—are considered. If the average CPI-W from this period in the current year surpasses that of the previous year’s third quarter, it indicates inflation, and beneficiaries are likely to receive a “raise” in the following year.
How the COLA Increase is Calculated
This meticulous process ensures that beneficiaries receive adjustments that reflect the real-world changes in the cost of living.
- The increase in benefits is determined by the percentage difference in the average third-quarter CPI-W readings from year to year.
- This percentage is rounded to the nearest tenth of a percent to finalize the adjustment amount.
The historic expansion of the U.S. money supply has significantly impacted the prevailing inflation rate and, consequently, the Social Security COLAs (Cost-of-Living Adjustments) in recent years. According to data from YCharts, this trend has been quite noticeable.
The 2026 Cost-of-Living Adjustment
For many retired-worker beneficiaries, their Social Security payouts are essential for making ends meet. With this in mind, there’s growing excitement around the anticipated 2026 COLA, which is expected to provide an above-average increase. Following a phase of notably weak adjustments, the past four years have seen substantial increases in retirement benefit checks. U.S. money supply during the COVID-19 pandemic, which led to a surge in the prevailing inflation rate and, correspondingly, in Social Security COLAs:
- 5.9% COLA in 2022
- 8.7% COLA in 2023
- 3.2% COLA in 2024
- 2.5% COLA in 2025
To put these figures into perspective, the 8.7% increase in 2023 represented the highest percentage increase in 41 years. Moreover, each of these four “raises” exceeded the average COLA of 2.3% observed over the past 16 years. This trend highlights the significant impact of economic policies and market conditions on retirement benefits.
For the first time in nearly three decades, Social Security cost-of-living adjustments (COLAs) are on track to reach at least 2.5% for five consecutive years. Between 1988 and 1997, COLAs varied from 2.6% to an impressive 5.4%. If current trends continue, 2026 will mark a significant milestone in the 21st century.
Projected Increases in Social Security COLAs
In mid-August, after the U.S. Bureau of Labor Statistics released the July inflation report, several independent estimates for the 2026 COLA were either maintained or adjusted upwards. For the fifth month in a row, the nonpartisan senior advocacy group, The Senior Citizens League (TSCL), raised its forecast for the 2026 COLA by a tenth of a percent, now standing at 2.7%. Simultaneously, independent Social Security and Medicare policy analyst Mary Johnson also kept her COLA estimate steady at 2.7%.
Recent increases in these independent estimates can be attributed to the slight inflationary effects brought about by former President Donald Trump’s tariffs. Although these numbers are predictions, a 2.7% COLA would result in an average monthly increase of $54 for retired-worker beneficiaries in the upcoming year.
- Historical Context: COLAs from 1988-1997 ranged between 2.6% and 5.4%.
- Current Projections: TSCL and Mary Johnson both predict a 2.7% COLA for 2026.
- Inflation Impact: Modest inflation due to tariffs plays a role in the COLA estimates.
- Beneficiary Impact: An estimated $54 monthly increase for retired-worker beneficiaries.
Retirees Face a No-Win Scenario Despite Historical COLA Trends
According to an analysis by TSCL, the purchasing power of a Social Security dollar plummeted by 20% between 2010 and 2024. This means that what $100 of Social Security income could purchase in 2010 could only cover $80 worth of those same goods and services by 2024. This significant decrease in buying power highlights the inherent flaws in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Social Security benefits are fundamentally linked to the inflationary patterns observed in the spending habits of “urban wage earners and clerical workers.” Interestingly, this group seldom includes individuals aged 62 and above who are already receiving Social Security benefits. Despite the fact that a substantial 87% of Social Security recipients are 62 or older, the index used to calculate Cost-of-Living Adjustments (COLAs) is tethered to the expenditure behaviors of working-age Americans.
Rising Costs and Their Impact on Retirees
The inflation rate, particularly concerning shelter and medical care services—the two primary expenses for retirees—continues to surpass the anticipated COLA for 2026. This trend suggests a significant risk of diminished purchasing power for retirees. Even if inflation rates for these critical expenses ease, many retired-worker beneficiaries are likely to experience their 2026 cost-of-living adjustment being significantly reduced by an escalating Medicare Part B premium. This segment of Medicare is crucial as it covers outpatient services.