All it takes is a trip to your local grocery store, convenience store, or department store to see how much inflation has affected the prices of many goods and services over the years. On one hand, modest inflation is needed to keep the economy growing and is preferable to stagnant prices and deflation. On the other hand, nobody likes to see their buying power being eroded.
Inflation affects everyone, but it can be especially impactful to Social Security recipients because they get a fixed monthly amount. To help combat this, Social Security has an annual cost-of-living adjustment (COLA) that's meant to offset the effects of inflation.
The COLA for the upcoming year will be announced on Oct. 15, but various organizations put out estimates beforehand based on the data that's available. Read one to see what the Social Security Administration (SSA) Board of Trustees believes the new COLA could be and its implications.
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How Social Security calculates the COLA
The SSA decides the COLA by looking at changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a monthly metric released by the Bureau of Labor Statistics. It tracks changes in prices for common goods and services, with the intention of being a measure of inflation.
First, the SSA averages the CPI-W numbers for July, August, and September, the third quarter of the current year. Then, it compares that average to the year-ago average. If there was an increase, the percentage difference is what the COLA for the upcoming year is set at (rounded up to the nearest tenth of a percentage point).
For example, the CPI-W numbers increased by 2.48% from 2023 to 2024, which is how we got the 2.5% COLA for 2025. If the third-quarter CPI-W numbers remain the same or decrease from 2024, there will be no COLA. It's uncommon for this to happen, but there have been instances, such as in 2010, 2011, and 2016.
The base-case scenario for 2026, from the SSA Trustees
The SSA Board of Trustees is responsible for monitoring the financial health of the Social Security trust funds. It also releases an annual report on the state of the program, including projections of what the upcoming COLA could be.
In its latest report, the board has the best-case scenario for the 2026 COLA at 3%. If the $2,008 average monthly benefit for August were to hold up, this means the average benefit in 2026 would be just over $2,068, and the maximum benefit would be around $5,261 (it's currently $5,108).
A 3% COLA would be the fourth-largest in the past 13 years, but it's unlikely to reach that amount unless there's a noticeable jump in inflation this month. A more conservative estimate would be the 2.7% from The Senior Citizens League (TSCL), a nonpartisan advocacy group.
Should retirees celebrate a 3% COLA?
A 3% COLA may seem good on the surface, but it also means that inflation is rising, which isn't the best news for retirees because studies have shown that COLAs haven't been the most effective at canceling out the true effects of inflation that retirees face.
According to a TSCL report, Social Security benefits lost 20% of their purchasing power between 2010 and 2024. This means $1 in 2010 would only be worth around $0.80 today. Needless to say, that's not ideal.
This isn't meant to discourage Social Security recipients, but it should help retirees keep their COLA expectations in check and highlight the importance of having other retirement income or budgeting accordingly.
