3 Things About Social Security Cost-of-Living Adjustments (COLAs) All Retirees Need to Know

At this point, we're less than a week away from what could be the biggest Social Security announcement of the year.

On Oct. 15, the Social Security Administration is set to unveil an official cost-of-living adjustment (COLA) for 2026. It's news many retirees are eager to get, as it will determine how much extra money they get in their monthly benefits in the new year.

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As we gear up for that big reveal, it's important to have the backstory on Social Security's COLAs. Here are three important things to know about them.

1. The formula used to calculate COLAs has some major flaws

The purpose of Social Security COLAs is to help ensure that benefits are able to keep up with inflation. But that doesn't mean COLAs always do the job they're supposed to.

The Senior Citizens League, an advocacy group, found that Social Security benefits lost 20% of their buying power between 2010 and 2024. And a big reason was due to insufficient COLAs.

The problem is that COLAs are based on year-over-year changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- an index that does not do a stellar job of capturing the costs seniors on Social Security face.

For example, Social Security recipients tend to spend a lot of their money on healthcare costs. The CPI-W, however, doesn't give healthcare a very heavy weight. But healthcare costs have, in recent years, risen faster than inflation, so they've eaten into seniors' income a lot. That's something COLAs have not reflected.

And that's just one mismatch. The reality is that the spending habits of urban workers are apt to differ from those of retirees who may or may not reside in urban areas. For this reason, advocates have long supported using a different formula to calculate Social Security COLAs -- the Consumer Price Index for the Elderly.

2. There's no such thing as a negative COLA

Since Social Security COLAs are tied directly to inflation, there's no guarantee that benefits will increase from one year to the next. And the reason is that inflation is not guaranteed to increase every single year.

In fact, it's possible to have a decrease in the CPI-W year over year. When that happens, though, Social Security benefits do not decrease as well.

Put another way, there's no such thing as a negative COLA, so the worst-case scenario for retirees in a given year is that their Social Security checks stay the same. But for retirees without savings, not getting an increase could be a tough pill to swallow.

3. Seniors don't always get to keep their COLAs in full

Social Security COLAs are supposed to boost buying power for seniors in line with inflation. But seniors also don't always get to keep their COLAs fully.

Older Americans who collect Social Security while being enrolled in Medicare have their monthly Part B premiums paid out of their benefits directly. This means that when there's an increase in the cost of Part B, it eats into COLAs, leaving seniors with less of a raise.

Granted, it's possible to make the argument that any expense that rises from year to year erodes a COLA as well. But since Part B premiums are paid directly out of Social Security benefits, the impact there is a lot more obvious.

Be prepared

An official 2026 COLA announcement is right around the corner. But it's a good idea to read up on how COLAs work, and how Social Security works, to be more informed on a whole. Having that information could help you better manage your finances as a retiree.

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