Social Security benefits are a lifeline for many retirees in the United States, providing a substantial portion of their income during retirement. On average, retired workers receive around $1,975 per month, and for many, Social Security is the only inflation-protected income source.
Each year, the Social Security Administration (SSA) reviews inflation data, adjusting Social Security benefits if needed. If you rely on Social Security, understanding the Cost-of-Living Adjustment (COLA) is crucial. Here’s everything you need to know.
1. How Is the COLA Calculated?
Social Security’s COLA is based on inflation, but the exact process for calculating it is not widely known. Every year, the SSA looks at Consumer Price Index (CPI) data for the third quarter of the year. This includes inflation data from July, August, and September of the current year, compared to the same months from the previous year. This is why COLA adjustments are announced in October—just after the third-quarter CPI data is released.
It’s important to note that the COLA isn’t always the same as the overall inflation rate. For example, the 2024 inflation rate was 2.9%, but the third-quarter inflation was lower, at 2.5%. The COLA uses the third-quarter CPI data, not the full-year inflation figure.
2. What Type of Inflation Is Used?
To calculate COLA, the SSA uses the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). This measure tracks inflation among workers, not retirees. While the CPI-W measures the inflation faced by working people, there is another inflation index called the CPI-E (Consumer Price Index for the Elderly).
This version emphasizes expenses that affect older Americans more, such as healthcare. However, the CPI-E is not currently used for Social Security COLAs, even though some have suggested it would better reflect the challenges retirees face.
3. The COLA Takes Effect in December, Not January
One common misconception is that the COLA for the year takes effect in January. While the COLA may be announced in October, it actually goes into effect in December. For example, the 2.5% COLA adjustment for 2025 will be reflected in December 2024 payments. However, because Social Security is paid one month behind, this means retirees won’t see the payment increase until January 2025. It’s important to understand this timing when planning for your retirement income.
4. There’s No Such Thing as a Negative COLA
Retirees might worry about the possibility of a negative COLA. For instance, if the CPI-W drops due to deflation, could Social Security benefits decrease? In theory, this is possible. Historically, there have been 13 years with negative CPI growth, the last being in 2009. However, under current rules, Social Security benefits cannot decrease. The worst-case scenario is that there would be no COLA at all, meaning Social Security benefits would remain unchanged for that year.
5. What Is the Average COLA?
Since the COLA formula was introduced in 1975, the adjustment has varied from a high of 14.3% in 1980 to as low as 0% in three different years. Over time, the average COLA has been around 3.75%. In recent years, however, the average has been lower. In the past decade, the COLA has averaged 2.6%. While this is less than the historical average, it still helps retirees keep pace with inflation to some degree.
6. What Will the 2026 COLA Be?
At this point, predicting the exact COLA for 2026 is difficult, as it will depend on inflation rates during the second half of 2025. However, early projections for 2026 suggest a modest increase. The Senior Citizens League has projected a COLA of just 2.1%, which would be the lowest adjustment in five years.
But many experts believe inflation could rise higher, with the Federal Reserve predicting around 2.5% inflation in 2025. Some economists expect inflation could be higher, which might lead to a higher COLA for 2026.
The $22,924 Social Security Bonus Most Retirees Overlook
If you’re like most Americans, you may be behind on saving for retirement. But did you know there are “Social Security secrets” that could boost your retirement income by as much as $22,924 each year? One simple trick could help you maximize your Social Security benefits so you can retire with confidence and enjoy peace of mind. By learning how to use your Social Security benefits to their fullest potential, you can ensure a more comfortable retirement, even if you’re starting to save later in life.
Disclaimer: This article has been meticulously fact-checked by our team to ensure accuracy and uphold transparency. We strive to deliver trustworthy and dependable content to our readers.
Benjamin Ford is a dedicated local journalist passionate about reporting on community news, events, politics, crime, and finance. With a sharp eye for detail and a commitment to uncovering impactful stories, he provides in-depth analysis and timely updates on issues that matter to the local audience. Benjamin enjoys engaging with the community and staying informed on emerging trends when he’s not covering the latest developments.
