Social Security's 2026 Cost-of-Living Adjustment (COLA) Should Be Historic -- but It's Not Great News for Retirees

For most aging Americans, Social Security income isn't something they can make do without. Based on 23 years of annual surveys from national pollster Gallup, 80% to 90% of retirees rely on their monthly Social Security check to cover some portion of their expenses.

Taking into account how vital this income is to the financial well-being of our nation's retired workers, perhaps it's no surprise that many wait on pins and needles for the annual cost-of-living adjustment (COLA) reveal from the Social Security Administration (SSA) during the second week of October.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

While early forecasts for the 2026 COLA point to history being made, it's not necessarily good news for retirees.

Image source: Getty Images.

Why is Social Security's annual COLA so important?

This fabled "COLA" you're always hearing about is the SSA's tool that helps account for the effects of inflation (rising prices) over time.

For example, let's say that a commonly purchased basket of goods and services by seniors increases in price by 4% from one year to the next. If Social Security benefits aren't adjusted by a commensurate percentage to account for this shift in cost, recipients will see their buying power decline. Thus, Social Security's COLA is the program's way of fighting back against rising costs.

From the first mailed retired worker check in January 1940 through 1974, Congress was responsible for adjusting payouts. However, these special sessions of Congress were entirely arbitrary, leading to only 11 COLAs during this 35-year period.

Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became Social Security's inflationary measure. The CPI-W tracks more than 200 different spending categories, all of which have their own specific weightings. This allows for easy year-over-year cost comparisons and for COLAs to be adjusted annually, if necessary.

The interesting quirk about Social Security's COLA calculation is that only CPI-W readings from the third quarter (July through September) are used. If the average CPI-W reading from these months is higher in the current year than the comparable period of the previous year, inflation has occurred and Social Security beneficiaries are due a raise.

An uptick in the prevailing rate of inflation sent COLAs notably higher in recent years. US Inflation Rate data by YCharts.

Social Security's 2026 cost-of-living adjustment should be historic

In February, more than 52 million retired worker beneficiaries took home a Social Security check that averaged $1,980.86. This means any cost-of-living adjustment of 1% or greater in 2026 is going to make history by lifting the average monthly benefit above $2,000.

Based on the latest 2026 COLA forecast update, next year's raise is on track to more than double this figure. Following the release of the February inflation report from the U.S. Bureau of Labor Statistics (BLS), nonpartisan senior advocacy group The Senior Citizens League (TSCL) adjusted its 2026 COLA forecast to 2.2%. While this is down from 2.3% in the previous month, it's still above the initial 2.1% prognostication following the December inflation report from the BLS.

Although we're still more than six months away from the SSA officially revealing the 2026 COLA, a 2.2% raise, if accurate, would increase the average retired workers' check by about $44 per month. Meanwhile, workers with disabilities and survivor beneficiaries would see their respective monthly payouts grow by $35 and $34.

One of the core catalysts that's helped fuel above-average COLAs in each of the previous four years is shelter inflation. The cost to put a roof over your head is the highest-weighted expenditure among the more than 200 expenses the CPI-W tracks.

According to the Consumer Price Index for All Urban Consumers (CPI-U), which is an inflationary measure that's similar to the CPI-W, shelter costs rose by 4.2% over the trailing-12-month period. Despite this being the smallest inflationary increase for shelter expenses since December 2021, it's provided a notable lift to the prevailing rate of inflation and thus annual Social Security COLAs.

Image source: Getty Images.

Retirees continue to receive the short end of the stick

On paper, the prospect of the average retired worker benefit surpassing $2,000 per month probably sounds fantastic. But when the lens is widened, these cheers are likely to turn into tears for a couple of reasons.

To start with, the CPI-W has historically done a poor job of accounting for the expenditures that matter most to retirees. For example, seniors spend a considerably higher percentage of their monthly budget on shelter and medical care expenses than the typical working-age American. However, the CPI-W is focused on the spending habits of "urban wage earners and clerical workers," who are usually of working age and not currently receiving a Social Security check.

Regardless of how big or small Social Security's annual cost-of-living adjustment is, if the trailing-12-month inflation rate for shelter and/or medical care services is higher than the COLA retirees receive, they're likely to lose buying power.

Based on an analysis released by TSCL in July 2024, the buying power of a Social Security dollar has declined by 20% for retirees since 2010. This erosion in buying power is likely to continue in 2026, with shelter and medical care services inflation currently higher than the projected COLA.

The other reason a nominally higher Social Security check isn't necessarily good news for retirees is because the Old-Age and Survivors Insurance Trust Fund (OASI) is forecast to exhaust its asset reserves by 2033. The OASI is responsible for dishing out payments to retired workers and survivor beneficiaries each month.

If ongoing demographic shifts, coupled with inaction from lawmakers on Capitol Hill, eventually deplete the OASI's asset reserves in eight years, the Social Security Board of Trustees estimates that sweeping benefit cuts of up to 21% may be needed to sustain payouts through 2098.

Long story short, the higher the COLA, potentially, the greater the likelihood of expediting the timeline to possible sweeping benefit cuts.

The $22,924 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

View the "Social Security secrets" »

The Motley Fool has a disclosure policy.