In January, nearly 52 million retired-worker beneficiaries collected an average Social Security check totaling $1,978.77. While this is a relatively modest monthly payout, Social Security income has historically laid a financial foundation for most retirees.
Based on an analysis from the Center on Budget and Policy Priorities, no social program lifts more people above the federal poverty line than Social Security. In 2023, it hoisted 22 million Americans out of poverty, including 16.3 million adults aged 65 and over. If Social Security didn't exist, the poverty rate for seniors would be nearly four times higher -- 10.1% including Social Security versus an estimated 37.3% without it.
Furthermore, 23 years of annual surveys from Gallup have shown that between eight and nine out of every 10 retirees rely on their monthly payout, in some capacity, to make ends meet.
Image source: Getty Images.
Given how important Social Security income is to the financial well-being of retirees, it should come as no surprise that the cost-of-living adjustment (COLA) reveal is the most awaited annual event for beneficiaries.
But following the latest update to Social Security's 2026 COLA, a bit of luster and anticipation has likely been lost.
What, exactly, is Social Security's COLA?
Social Security's cost-of-living adjustment is the mechanism by which the Social Security Administration (SSA) attempts to tether benefits to the prevailing rate of inflation.
For instance, let's hypothetically assume the collective cost for an assortment of goods and services regularly purchased by retirees climbs by 3% from one year to the next. If Social Security benefits remained static, retirees wouldn't be able to purchase the same amount of goods and services. The program's COLA attempts to mirror these price changes to ensure there's no loss of buying power.
Prior to 1975, there wasn't a defined system in place to adjust benefits for inflation (rising prices). From the first retired-worker payout in January 1940 through 1974, COLAs were passed by special sessions of Congress. After no adjustments were made during the entirety of the 1940s, 11 COLAs were administered from 1950 through 1974.
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became Social Security's annual inflationary tether. The CPI-W contains more than 200 price categories, all of which have their own unique percentage weightings. These weightings are the key to whittling the CPI-W down to a single figure at the end of each month, which allows for quick comparisons to determine if prices are, collectively, rising (inflation) or falling (deflation).
What's unique about Social Security's COLA calculation is that it only factors in CPI-W readings from the third quarter (July through September). If the average CPI-W reading from the third quarter of the current year is higher than the same period from the previous year, inflation has occurred and beneficiaries will see their payouts climb in the upcoming year.
A big uptick in the prevailing rate of inflation has led to four consecutive years of above-average COLAs. US Inflation Rate data by YCharts.
Social Security's 2026 cost-of-living adjustment is on pace to disappoint
Just as there's been a night-and-day difference to assigning COLAs since Social Security's inception, there's been quite the variation in cost-of-living adjustments over the last two decades.
Since the CPI-W became Social Security's inflationary measure, there have only been three years where deflation occurred and benefits remained static from one year to the next: 2010, 2011, and 2016. The 2010s were also home to the smallest positive COLA in history (0.3% in 2017).
Following a decade of anemic cost-of-living adjustments, a historic increase in the U.S. money supply sent the prevailing rate of inflation soaring in the 2020s. This resulted in corresponding COLAs of 5.9% in 2022, 8.7% in 2023, 3.2% in 2024, and 2.5% in 2025. For some added context, the average annual benefit increase since 2010 is 2.3%.
Suffice it to say, retired-worker beneficiaries are looking for this streak of above-average raises to continue for a fifth year. But based on the latest update following the release of the February inflation report from the U.S. Bureau of Labor Statistics, the odds of this happening aren't looking great.
Over the trailing-12-month period, the prevailing rate of inflation for the CPI-W cooled to 2.7% in February from 3% in the previous month. This coerced the policy analysts at nonpartisan senior advocacy group The Senior Citizens League (TSCL) to update their 2026 COLA forecast.
After the BLS released the January inflation report, TSCL was estimating Social Security checks would rise by 2.3% next year. But with the pace of inflation slowing, the 2026 COLA forecast has slipped to 2.2%, which is below the average annual increase since 2010.
Although a 2.2% cost-of-living adjustment would make psychological history by pushing the average monthly retired-worker check above $2,000 for the first time, it would still mark the smallest percentage increase in five years.
Image source: Getty Images.
But wait -- there's more
However, a lower-than-anticipated COLA in 2026 is only half the story.
If annual cost-of-living adjustments were to perfectly match the prevailing rate of inflation that retirees are contending with, it wouldn't matter whether COLAs were climbing by 1% or 8% each year. The issue is that annual COLAs often fall well short of the actual inflationary pressures retirees are facing.
According to a July 2024 analysis from TSCL, the purchasing power of a Social Security dollar has declined by 20% since 2010. In other words, what $100 in Social Security income could purchase in various goods and services in 2010 can buy only $80 worth of those same goods and services in July 2024.
The prevailing issue for Social Security is that the CPI-W doesn't do a particularly good job of accounting for the expenses that matter most to seniors. Compared to the typical working-age American, seniors spend a higher percentage of their budget on shelter and medical care services. Unfortunately, the inflation rate for these two spending categories has consistently outpaced the COLAs retired-worker beneficiaries have received.
Based on data from the Consumer Price Index for All Urban Consumers (CPI-U) in February, which is a similar inflationary index to the CPI-W, the trailing-12-month (TTM) inflation rate for shelter and medical care services clocked in at 4.2% and 3%, respectively. Though the TTM inflation rate for shelter modestly declined from 4.4% in the prior month, it accelerated by 30 basis points to 3% for medical care services.
As long as the costs that matter most to retirees are climbing at a noticeably faster pace than the assigned/forecast COLA, it points to an almost-guaranteed scenario where beneficiaries will see the buying power of their Social Security income decline.
Although we're more than six months away from the SSA's 2026 COLA reveal, it's shaping up to be a double whammy for retirees.
