There's a reason lawmakers decided several decades ago that Social Security benefits would be eligible for a cost-of-living adjustment (COLA) automatically each year, as opposed to having to vote one in on an annual basis. Without COLAs, seniors on Social Security would practically be guaranteed to lose buying power from year to year. Making them automatic is a great way to simplify things and avoid burdening lawmakers.
In recent years especially, we've seen how inflation can soar suddenly and not back down. Consumers on the whole have been battling rampant inflation since 2021. And at this point, many people are tired of feeling like their paychecks aren't going far enough -- retirees included.
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Of course, a more generous COLA might help seniors on Social Security feel better about their financial prospects. And in that regard, there's some good news.
The nonpartisan Senior Citizens League, an advocacy group, puts out a Social Security COLA estimate each month based on inflation data. And the group's current projection calls for a 2.7% COLA in 2026. If that number ends up being correct, it would set seniors up with a larger COLA than what they received at the start of 2025 -- a 2.5% increase.
But while a more generous COLA might seem like a good thing for Social Security beneficiaries, retirees may not be happy with one in practice.
How Social Security COLAs are calculated
Social Security COLAs aren't arbitrary. Rather, they're tied to changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
When there's an increase in the CPI-W during the third quarter of the year, Social Security benefits get a boost the following year. When there's a decrease in the CPI-W during the third quarter, or no change, benefits stay where they are.
Because Social Security COLAs are tied to the CPI-W, any increase seniors get comes as the result of higher levels of inflation. But that basically creates a no-win situation for those who rely on those benefits to make ends meet.
Why a larger 2026 COLA isn't necessarily good news
If Social Security's 2026 COLA comes in at 2.7% or higher (which is still a possibility), it will mean that inflation has picked up. So what seniors gain in the form of larger monthly Social Security checks, they stand to lose in the form of higher costs everywhere they look.
Plus, one big flaw in Social Security's COLA calculation is that the CPI-W does not accurately represent the costs retirees tend to face. Healthcare, for example, is a huge expense that tends to eat up seniors' savings. And it often outpaces inflation broadly in terms of cost increases.
That's not reflected in the CPI-W, though. And so even if seniors get a larger COLA in 2026, it may not be enough to actually help them keep up with their costs.
It's best not to be too reliant on COLAs
Any time Social Security benefits get a large COLA, it comes at the price of painfully elevated inflation. You need to recognize this if you're in the process of planning for retirement.
Since Social Security benefits have historically done a poor job of keeping up with inflation, it's important to set yourself up with retirement savings to supplement those monthly checks. Contribute to an IRA or 401(k) plan as early on in your career as possible, and invest your savings wisely so your money is able to grow.
Social Security COLAs aren't always a match for inflation, but an investment portfolio that's set up correctly could do a good job of beating it. That's something you'll need once you're ready to bring your career to a close.
