Decades ago, lawmakers made the decision to have Social Security benefits automatically adjusted each year for cost-of-living increases (COLA), rather than requiring an annual vote. Without these automatic adjustments, seniors relying on Social Security would almost certainly see their purchasing power diminish over time. Automating COLAs streamlines the process and removes the burden from legislators.
Especially in recent years, we've witnessed how quickly inflation can spike and remain high. Since 2021, consumers have been grappling with significant inflation. Many people, including retirees, are growing weary of seeing their income stretched thinner and thinner.
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Understandably, a higher COLA could give Social Security recipients more confidence about their financial future. In that sense, there is some positive news to share.
The Senior Citizens League, a nonpartisan advocacy organization, releases monthly Social Security COLA forecasts based on inflation trends. Their latest estimate predicts a 2.7% COLA for 2026. If this projection holds true, it would surpass the 2.5% increase that beneficiaries received at the beginning of 2025.
However, while a larger COLA might appear beneficial for those on Social Security, retirees may not actually welcome it when it arrives.
How Social Security COLAs are calculated
Social Security COLAs are not determined randomly. Instead, they are linked to changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
If the CPI-W rises during the third quarter of the year, Social Security payments are increased for the following year. If the CPI-W remains flat or drops in that period, benefits do not change.
Because COLAs are based on the CPI-W, any increase in benefits is a direct result of higher inflation. This essentially puts those who depend on Social Security in a difficult position, as their increased payments are offset by rising costs.
Why a bigger COLA in 2026 may not be entirely positive
If the COLA for Social Security in 2026 reaches 2.7% or more (which is still possible), it signals that inflation has accelerated. So, while seniors might see larger Social Security deposits, they will also face higher prices across the board.
Additionally, a major weakness in the way Social Security calculates COLAs is that the CPI-W does not accurately reflect the expenses most retirees encounter. Healthcare, for instance, is a significant cost for seniors and often rises faster than general inflation.
This reality isn't captured by the CPI-W. So, even if retirees receive a larger COLA in 2026, it may still fall short of covering their actual expenses.
Why you shouldn't rely too heavily on COLAs
Whenever Social Security benefits see a substantial COLA, it usually comes hand in hand with high inflation. If you are preparing for retirement, it's important to keep this in mind.
Since Social Security has historically struggled to keep pace with inflation, it's wise to build up your own retirement savings to supplement those monthly payments. Start contributing to a 401(k) or IRA early in your career and invest thoughtfully to help your savings grow over time.
COLAs from Social Security don't always keep up with inflation, but a well-managed investment portfolio can potentially outpace it. This will be crucial when you decide to retire.
