Social Security is undoubtedly a vital income source for seniors, and there are many great aspects of the program's design.
For one thing, you earn benefits based on average wages, so your retirement checks are based in part on how much income you're used to living on. Benefits also have some inflation protections built in. And, since the benefits are universal, available to all workers, and considered earned benefits, Social Security has proved very popular and resistant to changes, including cuts or privatization.
However, Social Security has some flaws too. Those flaws will continue to be issues in 2026, and they'll continue to hurt the finances of retirees next year.
Here are the two big Social Security downsides that both current and future retirees need to be aware of as they make their retirement plans.
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1. Social Security's COLA formula isn't working well
The first big issue with Social Security that will be a persistent problem in 2026 has to do with Social Security cost-of-living adjustments (COLAs).
COLAs are periodic increases to monthly Social Security checks that are supposed to help ensure benefits don't lose buying power as the cost of living rises. Since inflation means that prices go up over time, benefits have to increase over time as well to avoid a huge loss of buying power. And they do.
Sadly, the formula that determines how much they increase is not working well. The COLA formula uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine how much to increase Social Security benefits.
Specifically, benefits increase when third-quarter data from CPI-W shows prices have risen year over year, and the benefits increase equals the average percentage change from one year to the next during that three-month period.
Unfortunately, urban wage earners and clerical workers tend to spend a smaller share of their income on purchases like healthcare and housing compared to retirees, and those categories of spending tend to see price increases that outpace overall inflation. The end result is that the COLA formula often underestimates the cost increases actually experienced by seniors. And the formula underestimates those increases to a major extent.
Specifically, the Senior Citizens League revealed that the average payment retired workers received in 2024 was worth just $0.80 on the dollar compared with the amount that retirees received in 2010.
Losing such a significant percentage of the value of Social Security benefits can damage the finances of retirees who may not have a ton of extra money in their retirement plans, and who may need their retirement benefits to maintain purchasing power during their later years.
This will continue to be an issue in 2026, when it's very possible that the 2.8% cost-of-living adjustment retirees get next year will fall short of how much their costs go up.
2. Income thresholds for benefit taxes aren't indexed to inflation
The second big problem with Social Security that will persist into 2026 relates to how benefits are taxed.
Social Security benefits didn't used to be taxed at all. However, reforms in the 1980s added taxes on a portion of benefits, and further reforms in the 1990s added a second tier of taxation.
Based on these changes, retirees with provisional incomes of $25,000 for single tax filers or $32,000 for married tax filers end up being taxed on a portion of their benefits, with provisional income equaling half of all Social Security benefits, some taxable income, and some non-taxable income.
While initially just a small percentage of higher-income retirees paid these taxes, the income thresholds are not indexed to inflation. This means a growing number of retirees get hit with taxes every single year. This includes even people who aren't high earners and who may not have much money in their 401(k) and IRA to supplement benefits.
While President Trump indicated that he wanted to eliminate taxes on Social Security and solve this problem, this did not occur. The president did introduce a new tax break for retirees, but it's not related to retirement benefits at all. It's also effective only until 2028, so it's a short-term source of help for seniors. The problem of more and more retirees losing benefits to taxes each year persists.
Seniors need to be aware of this when making their plans for the upcoming year so they have a clearer understanding of their financial situation.
