If there's one annual change to Social Security that retirees should be aware of, it's the program's annual cost of living adjustment (COLA). The COLA determines how much Social Security benefits will increase the next year and is key for retirees as they plan their budgets. The COLA is based on third-quarter inflation and announced in October, so upcoming economic data is going to be crucial. Unfortunately, the COLA news so far hasn't been great for retirees, and there could be even more bad news coming.
The COLA can be a double-edged sword
As I mentioned above, the COLA is determined in the third quarter of the year during the months of July, August, and September. Specifically, it measures the year to year change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during those months. This is different from the closely watched Consumer Price Index for All Urban Consumers (CPI-U) that regularly makes headlines each month.
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The CPI-W is a subset of the CPI-U that looks at the prices of goods primarily for blue-collar workers. To determine the actual COLA, the Social Security Administration (SSA) averages the CPI-W readings for July, August, and September. It compares the resulting number to the average of those months from the previous year. Any increase becomes the next COLA amount, while no change or the rare decrease means benefits will remain the same. Here is how the CPI-W has trended through the first seven months of the year.
| Month | CPI-W % Change (year over year) |
|---|---|
| January | 3.0% |
| February | 2.7% |
| March | 2.2% |
| April | 2.1% |
| May | 2.2% |
| June | 2.6% |
| July | 2.5% |
Source: Social Security Administration
As you can see, increases to the monthly CPI-W started higher before declining and rebounding again. The non-partisan Senior Citizens League (SCL), which keeps a close eye on all things Social Security, believed at the beginning of the year that inflation would quickly decline. The group initially predicted the 2026 COLA would be 2.1%. However, after the rebound in the CPI-W, the SCL is now calling for a 2.7% COLA.
The good news is that a higher COLA gives retirees more money, but the COLA is also a double-edged sword. Sure, it increases benefits, but the increase is usually during a period of rising inflation, which makes the cost of living higher. And once prices rise, it's uncommon for them to decline. Even when the COLA comes in lower than in previous years, that doesn't mean prices have stopped rising; it just means they're rising at a slower rate.
It gets worse
Each year, the SCL regularly publishes a study about the purchasing power of Social Security recipients, and they regularly find that retirees are losing purchasing power because COLAs are not keeping pace with inflation.
The SCL's 2024 study found that average Social Security benefits last year were only actually worth 80 cents on the dollar compared to 2010, meaning that retirees have lost 20% of their purchasing power. The study also found that payments would need to rise over $4,440 annually, on average, to get back to the purchasing power experienced in 2010. That's a lot when you consider the average monthly benefit in July of this year for a retiree was roughly $2,007.
The problem seems to come down to the fact that COLAs end up lagging inflation, and over time, there is a compounding effect. According to the SCL, COLAs have lagged the annual rate of inflation in eight of the last 15 years, dating back to 2010. Of course, none of this is new, but given how COLAs only seem to have a 50% chance of keeping up with the actual rate of inflation in a given year, seeing inflation creep higher means there's a good chance the COLA won't keep pace again.
