Inflation has increased in every month since President Trump's baseline tariff took effect in April. Accordingly, Social Security benefits will get a historic 2.8% cost-of-living adjustment (COLA) next year, which means the average retired worker will receive an additional $56 per month.
Despite the historic pay raise, Social Security benefits are likely to lose purchasing power. Here are the important details.
Image source: Official White House Photo.
Social Security benefits get a historic COLA in 2026
Since 1975, Social Security benefits have received annual cost-of-living adjustments (COLAs) to protect their purchasing power from inflation. Prices across the economy gradually rise over time, meaning the amount of goods and services a dollar will buy gradually declines. COLAs are designed to solve that problem.
The Social Security Administration calculates COLAs based on how the CPI-W (a subset of the Consumer Price Index) changes in the third quarter, meaning the three-month period from July through September. The CPI-W increased 2.8% in the third quarter of 2025, so Social Security benefits will receive a 2.8% COLA in 2026.
What makes that historic? The 2026 COLA raises the five-year average to 4.6%, the highest level since 1986. In other words, when accounting for the 2026 COLA, Social Security benefits have risen more substantially during the past five years than at any other time in the last four decades.
Social Security's 2026 COLA may not be large enough
The CPI-W is arguably a poor measure of inflation for Social Security beneficiaries because, from their point of view, it understates the importance of housing and medical care.
Specifically, the CPI-W assumes expenses related housing and medical care account for about 42% and 7%, respectively, of the average person's total spending. But expenses related to housing and medical care account for about 48% and 11%, respectively, of the average senior's total spending.
One reason Social Security benefits will receive a historic COLA in 2026 is that President Trump's tariffs have made inflation worse. Since the baseline duty took effect in April, CPI-W inflation has risen from 2.1% to 2.9%. However, price increases have been particularly pronounced within the housing and medical care categories.
Here's how overall CPI-W inflation during the third quarter (July through September) compares with the price increases observed in goods and services within the housing and medical care categories:
- Overall CPI-W inflation averaged 2.8%.
- Housing inflation averaged 3.9%.
- Medical care inflation averaged 3.6%.
So, CPI-W inflation averaged 2.8% during the third quarter, but prices increased much faster in the housing and medical care categories. That is a problem for Social Security recipients because, from their perspective, CPI-W inflation understates the importance of those spending categories.
Put differently, if the housing and medical care components of the CPI-W were weighted based on how Social Security recipients actually spend money, then the CPI-W inflation measurement from the third quarter would have been a little higher, which means Social Security's 2026 COLA would have been a little larger.
Indeed, some experts think COLAs should be tied to the CPI-E (another subset of the Consumer Price Index) because it measures inflation based the spending habits of people aged 62 and older. That cohort more closely matches the Social Security population. The 2026 COLA would have been 3% had it been based on CPI-E inflation, in which case the average retiree would have received an additional $60 per month.
Here's the bottom line: Social Security benefits will get a historic COLA next year in part because of inflation caused by President Trump's tariffs. Nevertheless, benefits are likely to lose purchasing power next year because of pronounced price increases across housing and medical care. That means retirees may feel as if they have a little less money.
