Social Security's 2026 COLA Is on Pace to Do Something Not Seen Since 1985

Key Points

• Inflation makes goods and services more expensive over time, so Social Security benefits receive annual cost-of-living adjustments (COLAs) to compensate.

• The Senior Citizens Leagues estimates the 2026 COLA will be 2.7%, bringing the five-year average to 4.6%, which would be the highest level since 1985.

• Some experts believe COLAs should be calculated differently, which explains why many retired workers still feel like they have fallen behind inflation in recent years.

• The $23,760 Social Security bonus most retirees completely overlook ›

Goods and services across the economy tend to become more expensive as time passes, such that money gradually loses purchasing power. In 1965, gasoline cost $0.30 per gallon and the median home sold for $20,000. Gas prices are 10 times higher today, and the median home sells for 20 times more.

Social Security payments receive annual cost-of-living adjustments (COLAs) to help retired workers and other beneficiaries keep up with rising prices across the economy. And the 2026 COLA is on pace to do something last seen in 1985.

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 »

Here's what retirees should know.

Image source: Getty Images.

Social Security's 2026 COLA is on pace to bring the five-year average to 4.6%

The Federal Reserve sets monetary policy in an effort to balance two goals: maintain stable prices and foster maximum employment across the economy. With respect to stable prices, the Fed attempts to keep inflation at 2%, which means Social Security's COLAs should average 2% (more or less) over long periods. But that has not been the case recently.

The Senior Citizens League, a nonprofit advocacy group, estimates the 2026 COLA will be 2.7%. If accurate, that will bring the five-year average to 4.6%, the highest level since 5.7% in 1985. In that scenario, Social Security benefits will have increased more substantially in the last five years than at any other point in the last four decades.

Nevertheless, more than 50% of retired workers surveyed by The Motley Fool said the 2024 and 2025 COLAs were insufficient, meaning they thought benefits lost purchasing power because the COLAs failed to entirely offset the cost increases relevant to them. One plausible explanation for that sentiment is that the method by which COLAs are determined is flawed.

Why many retired workers still feel like COLAs have been too small lately

The Social Security Administration calculates COLAs based on annual changes in the CPI-W, a subset of the Consumer Price Index. The CPI-W tracks inflation based on the spending patterns of hourly wage earners and clerical workers. But young persons in the workforce tend to spend money differently than retired workers on Social Security.

Most notably, retirees generally spend more on housing and medical care, and they tend to spend less on transportation and education. For that reason, many experts believe COLAs should be based on the CPI-E, another subset of the Consumer Price Index. The CPI-E measures inflation based on the spending patterns of individuals aged 62 and older, which makes it a better match for Social Security beneficiaries.

The COLAs in 2024 and 2025 would have been much higher had they been based on the CPI-E rather than the CPI-W. Specifically, the 2024 COLA would have been 4% instead of 3.2%, and the 2025 COLA would have been 3% instead of 2.5%. So, if the CPI-E is truly a better measure of inflation for retirees, then Social Security's COLAs have underestimated inflation in recent years, which means they have been too small and benefits have lost purchasing power. That same pattern is playing out this year.

The Social Security Trust Fund could be depleted sooner than expected

Large COLAs come with a downside. While they theoretically protect the buying power of benefits, ensuring goods and services remain affordable for retired workers, they also mean the Social Security Administration must spend more money to pay benefits.

That is a problem because the Social Security Trust Fund, the account that holds money earmarked for benefit payments, is on pace to be depleted by 2034. However, the trustees arrived at that estimate by making several assumptions, including how big COLAs are likely to be in future years.

The trustees in 2019 predicted the Social Security Trust Fund would be depleted by 2035, and that forecast was based in part on the assumption that the average COLA would be 2.6% between 2022 and 2025. However, benefits increased much more substantially over that period, such that the trust fund is now on track to be exhausted in 2034.

With that in mind, the trustees expect COLAs to average 2.4% through 2034. But if benefits rise more quickly, the Social Security Trust Fund could be depleted earlier than expected. That would leave Congress with less time to solve a serious funding problem -- the Social Security Administration is projected to run a $3.6 trillion deficit during the next decade. If lawmakers cannot find a solution in time, benefits will be cut automatically.

The $23,760 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.

One easy trick could pay you as much as $23,760 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. Join Stock Advisor to learn more about these strategies.

View the "Social Security secrets" »

The Motley Fool has a disclosure policy.