Here's the Truth About Social Security COLAs -- and Why You Can't Count on Them

At this point, many seniors are itching to know what their 2026 Social Security cost-of-living adjustment, or COLA, will amount to. And if you're frustrated that an official COLA announcement hasn't come out yet, you're not alone.

The Social Security Administration (SSA) was supposed to announce a 2026 COLA on Oct. 15. But because of the government shutdown, a key inflation report wasn't released on time, forcing the SSA to delay its announcement.

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If all goes according to (the new) plan, the SSA should be making a COLA announcement on Oct. 24. But even if a larger COLA than expected is announced, it may not be something to celebrate.

The problem with Social Security COLAs

There are a couple of issues with Social Security COLAs that make them a bad thing for seniors to rely on heavily.

First, Social Security COLAs are meant to match inflation, not beat it. Here's what that means.

Let's say you've been struggling to cover your expenses. If you get a larger COLA, it probably won't improve your financial situation, because a larger COLA is indicative of higher levels of inflation. So the more your Social Security benefits rise, the more things might cost.

Second, the index that Social Security COLAs are based on is not particularly reflective of the costs retirees face. Because of this, seniors on Social Security tend to lose out on buying power through the years, even when COLAs are generous.

Social Security COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But not so surprisingly, an index that measures the costs and spending habits of wage earners and city dwellers isn't one that does a great job of capturing the costs that are specific to seniors.

Healthcare, for example, tends to be a very large expense for Social Security recipients. But healthcare doesn't carry a lot of weight in the CPI-W. And that's a problem, since in recent years, healthcare has been rising at a faster pace than inflation across the board.

A June 2024 Peterson-KFF report found that since 2000, the cost of healthcare had risen 121.3%. Meanwhile, prices for all consumer goods and services rose by 86.1% during that same time frame.

Because Social Security recipients tend to spend a large chunk of their benefits on healthcare, the COLAs they've received through the years have not made it possible to keep up with their costs as a whole -- even though those COLAs have been based on broad inflation. Advocates have pushed to use a senior-specific index to calculate COLAs, but that change has failed to gain traction.

So for now, Social Security recipients are stuck with an imperfect COLA measure. As a result, those raises might continue to fall short, leaving seniors in a bad spot.

How to improve your financial picture

It's important to recognize that Social Security COLAs have some major shortcomings -- and not to count on them too heavily. If you want to improve your financial picture in retirement, it's essential that you have income outside Social Security.

That income could come in different forms, such as:

• Withdrawals from an IRA or 401(k) plan
• Dividends from a stock portfolio
• Interest from a bond portfolio
• Earnings from a part-time job

Either way, it's important to have access to income outside of Social Security no matter what. Your IRA or 401(k), for example, might generate returns that better keep up with or beat inflation than Social Security. The same goes for an investment portfolio. And that's an important thing if you want to spend your retirement not stressing about money.

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