Breaking Down the Basics Behind the Social Security Cost-of-Living Adjustment
Early predictions are that the Social Security cost-of-living adjustment (COLA) for 2026 will be the lowest in recent years at 2.4 percent. This might lead one to wonder, how does Social Security calculate its COLA?
Investopedia did an excellent job of explaining it all in simple terms. In a nutshell, a cost-of-living adjustment is an increase made to Social Security benefits to offset the impacts of inflation and rising prices on the economy. Automatic COLAs began in 1975.
COLA Calculator
To measure inflation, Social Security compares the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the previous year to the third quarter of the current year. According to the article, the Consumer Price Index (CPI) represents the average prices of a basket of goods. If prices are high because of inflation, then the COLA will be high. However, if inflation is low, then we see a low COLA or none at all.
Right now, inflation seems to be subsiding. That is why analysts think we will see a lower COLA next year. The official 2026 COLA will be announced in October.
Time for an Update
Many people believe it doesn’t make sense to base the Social Security COLA, which determines benefit amounts for retirees, on the spending habits of members of the workforce. Senior advocates such as The Seniors Trust believe the Consumer Price Index for Americans 62 years of age and older (CPI-E) would be a better formula. It more accurately reflects the costs incurred by older adults, especially related to healthcare and housing.
The Social Security Expansion Act calls for adopting the CPI-E. Not only would this provide Social Security recipients with a fairer COLA, but this landmark piece of legislation also provides an across-the-board benefits boost of about $2,400 per year and long-term Social Security solvency.
