The Cost of Living Adjustment (COLA) is a key tool used by the Social Security Administration (SSA) to help retirees keep pace with the rising costs of living. Each year, the COLA is adjusted based on inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
This adjustment ensures that retirees’ benefits reflect the economic realities of their everyday expenses, from groceries to healthcare, helping them maintain their purchasing power despite inflation.
How COLA Works?
The process behind the COLA is fairly straightforward but vital for retirees. The SSA calculates the adjustment by examining the CPI-W, which tracks the prices of a basket of goods and services that a typical urban worker would purchase.
The CPI-W is a valuable indicator because it reflects the inflationary pressures on a broad section of the population, though it does not account for the unique spending patterns of seniors, such as the higher costs for healthcare and housing that they often face.
The SSA uses the percentage change in the CPI-W from the third quarter of the previous year to calculate the adjustment for the upcoming year. If inflation is low, there may be little or no increase in benefits.
However, when inflation is high, like it was in recent years, the COLA increases to ensure that Social Security beneficiaries can maintain their standard of living.
Recent Trends in COLA Increases
Over the last few years, retirees have seen significant COLA increases, mainly driven by the high inflation that swept through the global economy. In 2023, the COLA jumped by an impressive 8.7%, marking the largest increase in benefits since 1981.
This came on the heels of a 5.9% increase in 2022. The soaring inflation in 2021 and 2022 pushed the cost of everyday items to new heights, prompting the SSA to implement these record-breaking adjustments to help seniors stay afloat.
For many retirees, these large COLA increases were a welcome relief, helping to offset the increased costs of food, energy, and healthcare.
However, such substantial increases are not typical and are more a reflection of the unusual economic conditions caused by supply chain disruptions, labor shortages, and other factors linked to the pandemic’s aftermath.
Returning to Normal Levels
Looking ahead, experts predict that the COLA will return to more typical levels as inflation moderates. The Senior Citizens League (TSCL), a nonprofit organization focused on advocating for seniors, forecasts a 2.3% COLA increase for January 2026, following a 2.5% increase in January 2025.
These adjustments are much lower than the record-setting hikes seen in 2022 and 2023 and represent a return to the more usual COLA patterns seen before the pandemic.
The reduction in inflation through 2024 has played a significant role in this stabilization. As the global economy adjusts to post-pandemic conditions and supply chain disruptions ease, inflation has cooled, bringing down the cost of living.
This has allowed the SSA to project smaller, more manageable COLA increases, aligning more closely with historical trends.
While the return to normal levels may seem like a sign of economic recovery, it doesn’t come without its challenges. Despite the slight adjustments, many retirees remain concerned about the adequacy of their Social Security benefits. According to the TSCL, Social Security benefits have lost more than 30% of their purchasing power since 2000 due to years of low or insufficient COLA increases and the rising costs of healthcare.
The Problem with CPI-W: Why It Underestimates Senior Costs?
A major issue that retirees face is that the CPI-W, which the SSA uses to calculate COLA, doesn’t fully account for the expenses that are most relevant to seniors.
For example, healthcare costs for seniors have risen much faster than general inflation. According to the TSCL, the CPI-W underestimates the inflation seniors experience, especially in areas like prescription drugs, medical services, and housing.
The typical basket of goods in the CPI-W doesn’t reflect the fact that seniors tend to spend more on healthcare and housing as they age.
This discrepancy has led to growing calls for a more accurate inflation measure for seniors, one that better reflects their unique spending habits. The Consumer Price Index for the Elderly (CPI-E) is often proposed as an alternative. The CPI-E accounts for the higher costs of healthcare and housing, which make up a larger share of seniors’ expenses compared to younger workers.
While the difference between the CPI-W and CPI-E is small—just two-tenths of a percentage point—it can have a significant impact over time.
If the SSA used the CPI-E to calculate COLA increases, the average retiree could see an additional $14,000 in benefits over a 30-year retirement period. This could make a meaningful difference in the lives of many seniors, helping them maintain their financial stability throughout retirement.
Legislative Efforts for Better Protection
The issue of inadequate COLA increases has led to widespread advocacy for changes to the system. The TSCL supports several legislative efforts aimed at improving the COLA and ensuring that Social Security benefits keep pace with the real cost of living for seniors.
One such proposal is the CPI-E Act, which calls for the adoption of the CPI-E as the official measure for calculating COLA increases for seniors. This change would provide a more accurate reflection of the costs seniors face.
In addition to the CPI-E Act, the TSCL also supports the Guaranteed 3% COLA Act. This bill would guarantee a minimum 3% COLA increase each year, ensuring that benefits don’t lose their value due to inflation.
These measures would provide seniors with a more reliable financial foundation, protecting their purchasing power from the rising costs of healthcare, housing, and other essential goods and services.
What Retirees Can Expect Going Forward?
As the SSA adjusts Social Security benefits in the coming years, retirees must understand the implications of these changes. While the return to normal COLA levels signals some economic stabilization, it’s clear that there are ongoing challenges for seniors.
The high costs of healthcare and housing remain a significant burden for many, and the current COLA system does not fully address these expenses.
For retirees, advocating for changes like the CPI-E and the Guaranteed 3% COLA Act will continue to be important.
These legislative efforts aim to ensure that Social Security remains a reliable source of income for seniors, helping them navigate the challenges of rising living costs.
Ultimately, the COLA system, while an essential safeguard, needs to evolve to better reflect the realities faced by seniors.
As inflation continues to fluctuate, lawmakers and advocacy groups must keep pushing for reforms that provide seniors with the financial support they need to live with dignity and security in retirement.