3 Things All Retirees Need to Know About Social Security COLAs

Social Security is by far the largest retirement benefits program in the United States, with 68.6 million people receiving benefits, including 52 million retired workers, as well as spouses, survivors, children, and workers with disabilities. There's another 7.4 million people who receive income from another Social Security program known as Supplemental Security Income, or SSI.

Not only does Social Security provide guaranteed income, but it provides inflation-protected income through annual cost-of-living adjustments, or COLAs. While the general idea behind the annual COLA is fairly easy to understand (your Social Security increases along with inflation), there are some important facts about COLAs that you might not be aware of.

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With that in mind, here are three things all retirees need to know about Social Security COLAs.

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1. Why is the COLA announced in October every year?

The Social Security COLA uses Consumer Price Index, or CPI, data to determine the inflation rate. But it doesn't look at an entire year's worth of inflation data.

Instead, the SSA only looks at the third quarter (July, August, and September) of each year. It uses the data (specifically, the CPI-W) from the third quarter of the current year and compares it with the third quarter of the previous year, rounding the change to the nearest one-tenth of a percent. This is how the 2025 adjustment of 2.5% was determined.

Inflation data for each month is released by the Bureau of Labor Statistics (BLS) within a couple of weeks after the month ends. So, to get the complete picture of third-quarter inflation data, the SSA must wait until September data is released in October. As soon as October's CPI data is released, the next year's COLA is announced almost immediately.

On a similar note, this also means that any 2026 COLA projections you've seen are just that: projections. We won't have any of the actual inflation data used to calculate next year's adjustment until CPI data for July becomes available.

2. Inflation can affect elderly Americans differently than the rest of us

As mentioned, the COLA uses a version of the Consumer Price Index called the CPI-W, which stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers. In simple terms, this is designed to track the cost of goods and services as it affects workers, not retirees.

A few expenses impact retirees to a greater extent than the general population, and these have been rising at a greater rate than the CPI-W for years. Healthcare is the most obvious expense category that disproportionately affects the elderly, but housing is another big one. The average senior-led household spends a greater percentage of income on housing costs than the average working household.

There is another version of the Consumer Price Index, known as the CPI-E, which is specifically designed to track expenses as they affect older Americans. However, under current law, it is not used to determine Social Security COLAs.

3. There's no such thing as a negative COLA

As mentioned, Social Security COLAs are calculated by comparing Consumer Price Index data from the third quarter of the current year to the same period in the prior year.

While inflation is a natural part of a healthy economy, it's also important to know that prices don't always go up. In fact, sometimes CPI data declines year over year. When this happens, it is known as deflation.

Fortunately for Social Security recipients, there is no such thing as a negative COLA. Even if the cost of goods and services decline from one year to the next, the lowest a COLA can possibly be is 0%. However, there won't be any future COLAs until the cumulative inflation is positive.

For example, the last time we had a negative year-over-year inflation rate in the third quarter was in 2009 during the Great Recession, which resulted in a 0% Social Security COLA that year. However, even though there was positive inflation (roughly 1%) in 2010, there was also a 0% COLA that year, as the CPI was still negative overall for that two-year period.

COLAs protect seniors' purchasing power

For most seniors, Social Security will be their only inflation-protected source of retirement income. And although it isn't a perfect system, especially without using the CPI-E, it does help retirees maintain the bulk of their purchasing power over time.

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