Allen Giese, CLU®, ChFC®, ChSNC®, and ChatGPT
Every fall, the Social Security Administration (SSA) announces the cost-of-living adjustment—better known as the COLA—that determines how much benefits will increase for the following year. The COLA is intended to help retirees maintain their purchasing power as prices rise. But for many older Americans, the yearly bump doesn’t seem to go far enough. Has the COLA really kept pace with the cost of living in retirement?
How the COLA Is Calculated
The SSA bases each year’s adjustment on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a government measure of inflation that tracks price changes for a basket of goods and services commonly purchased by working households. When inflation rises, so does the CPI-W, and the COLA follows suit. For 2026, the estimate (at the time of this writing) is around 2.7% to 2.8%. For 2025, the increase was 2.5%, following 2024’s 3.2% and 2023’s unusually high 8.7%.
At first glance, this seems fair. After all, the COLA is tied directly to an objective measure of inflation. But the CPI-W doesn’t necessarily reflect how retirees spend their money.
The Retiree Reality
Retirees tend to spend a smaller share of their budgets on things like transportation and clothing—the categories that dominate the CPI-W—and much more on health care, housing, and utilities. These costs have risen faster than general inflation for years. Medicare premiums, prescription drugs, and out-of-pocket health expenses have been especially persistent drivers of higher living costs for older adults. According to the Senior Citizens League in a report published in March 2022, Social Security benefits have lost roughly 40% of their buying power since 2000, largely because the COLA formula doesn’t reflect retirees’ spending patterns.
If the adjustment were instead based on an index designed for older Americans—such as the Consumer Price Index for the Elderly (CPI-E)—benefits would have risen faster over time. The difference may seem small from year to year, but over decades it compounds significantly.
For most retirees, Social Security represents a core part of their income. When the COLA lags behind real costs, it effectively reduces retirees’ standard of living each year. Many are forced to draw more heavily on personal savings or delay discretionary spending just to keep up with everyday expenses. Meanwhile, the perception that benefits go up every year can be misleading. In years with modest inflation, the COLA may be only 1% or even zero—yet costs like property insurance, homeowner association fees, and medical expenses rarely stand still.
Looking Ahead
There have been proposals in Congress to adopt the CPI-E for calculating COLAs, but none has advanced. The debate reflects a broader challenge: balancing the financial sustainability of the Social Security system with the need to preserve the purchasing power of its beneficiaries.
For now, retirees should plan with the understanding that the COLA, while helpful, is not a guarantee of full inflation protection. Factoring realistic spending assumptions, especially for health care and housing, into retirement projections remains essential.