Social Security benefits in the US serve as the financial backbone for the nearly 57 million retirees who rely on these payments. However, over time, these benefits become insufficient as prices continue to rise.
Those monthly paychecks don’t seem to go as far when groceries, gas and seemingly everything else are more expensive than they were a few years ago, USA Today reported. For this reason, the U.S. Social Security program has an annual cost-of-living adjustment (COLA) that helps offset some of the effects of inflation.
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The report suggests that while the COLA system isn’t perfect, it’s still better than nothing.
Here are five things you should know about the Social Security COLA:
1. COLA is not based on a standard inflation metric, but rather on changes in inflation. The standard inflation number is the Consumer Price Index (CPI-U). However, US Social Security uses the Consumer Price Index for Urban Wage and Administrative Workers (CPI-W). While both the CPI-U and CPI-W track the prices of goods and services such as housing, food, and clothing, only the CPI-W focuses on households where the majority of income comes from clerical or hourly work. Moreover, while the CPI-U covers roughly 93% of the population, the CPI-W on the other hand covers 29%. CPI-U numbers are usually higher than CPI-W numbers.
2. Social Security does not factor in inflation numbers throughout the year; instead, it only looks at them in the third quarter (July, August and September). To help you understand, here’s the three-step process for setting up your annual COLA:
– CPI-W average for the 3rd quarter of the current year.
– Compare this to last year’s Q3 CPI-W average.
– Set the upcoming COLA as a percentage increase rounded to the nearest tenth of a percent.
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For example, the 3rd quarter average in 2025 was 2.8% higher than in 2024, giving us this year’s 2.8% COLA. The 2024 average was 2.5% higher than 2023, implying a 2.5% COLA in 2025.
3. It is worth noting that sometimes the CPI-W numbers for a particular year would be lower than the previous year. However, Social Security will not reduce benefits in such a scenario. The benefits can only be increased. While this doesn’t happen often, it happened in 2010, 2011 and 2016.
4. While Social Security and Medicare are two different welfare programs, they are linked because many Social Security recipients have Medicare Part B premiums automatically deducted from their Social Security benefits. The report suggests that there could be a possibility that Part B premiums may increase and offset some of the benefits beneficiaries may have received from the COLA, which happened earlier this year.
For example, if a person’s Social Security benefit was $2,000 in 2025, they would receive $56 more in 2026 after a 2.8% COLA. However, when Part B premiums increased by $17.90 to $202.90, this would indicate that they actually received only $38.10 in extra benefits.
5. Despite annual benefit increases, Social Security checks for retirees don’t go as far as they could. According to The Senior Citizens League (TSCL), a bipartisan senior advocacy group, Social Security benefits have lost 20% of their purchasing power since 2010. That means $100 back then could only buy $80 worth of items today, which, needless to say, isn’t ideal.
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Although there is no single solution to fix this other than increasing benefits beyond the COLA, which has long-term problems and would deplete the Social Security fund much faster. However, some people have suggested using a different metric, such as the CPI for those 62 and older (CPI-E), to determine the COLA.
