Social Security COLAs – 6 Important Things Retirees Must Know and How They Affect Your Income

Tens of millions of Americans rely on Social Security benefits as a key source of retirement income. With the average retired worker receiving around $1,975 per month, Social Security plays a crucial role in financial security. More importantly, it is one of the few income sources that is inflation-protected, thanks to the Cost-of-Living Adjustment (COLA).

Each year, the Social Security Administration (SSA) adjusts benefits based on inflation data to ensure retirees maintain their purchasing power. But how exactly is the COLA calculated, and what can retirees expect in the future? Let’s look into the details.

COLA Calculated

Many people know that COLA is based on inflation, but the specific calculation method is less widely acknowledge.

The SSA determines the COLA by looking at inflation data from the third quarter of each year. This means:

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• The Consumer Price Index (CPI) data from July, August, and September is compared to the same period in the previous year.
• If inflation has increased, Social Security benefits receive an upward adjustment.
• This method explains why the COLA is always announced in October—it follows the release of September’s inflation data.

It’s important to note that this calculation doesn’t always reflect the overall annual inflation rate. For example, in 2024, the average inflation rate was 2.9%, but the third-quarter inflation used for the COLA was only 2.5%.

Type of Inflation

The SSA calculates COLA using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

However, there is a key issue with this:

• CPI-W is designed for working Americans, not retirees.
• Many experts argue that the Consumer Price Index for the Elderly (CPI-E) would be a better measure since it accounts for higher healthcare costs, which disproportionately affect seniors.
• Despite this, CPI-E is not currently used to calculate Social Security COLAs under existing laws.

COLA

While many refer to the most recent COLA as the “2025 COLA”, this is actually incorrect.

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• The 2025 COLA (2.5%) technically took effect in December 2024.
• However, because Social Security is paid one month in arrears, retirees don’t receive the increase until January 2025.

So, even though the COLA is announced in October and applies in December, the higher payments aren’t actually received until January.

Negative

What happens if inflation decreases? Would Social Security benefits go down?

The answer is no. While inflation rates can drop, the COLA cannot be negative.

• If the CPI-W shows negative growth, the lowest possible COLA is 0%—meaning benefits remain the same.
• This has happened three times since the modern COLA system began in 1975.
• The most recent example of negative CPI growth was in 2009, but COLA remained unchanged.

Average COLA

Since COLA adjustments began in 1975, the annual increases have varied significantly.

Year	Highest COLA	Lowest COLA	Average COLA Since 1975	Average in the Last Decade
1980	14.3%	0% (3 times)	3.75%	2.6%

While historically the average COLA has been around 3.75%, recent adjustments have been lower, averaging 2.6% over the last decade.

2026 COLA

Predicting next year’s COLA is difficult because it depends on third-quarter inflation data, which hasn’t been recorded yet.

However, here’s what experts are saying:

• The Senior Citizens League has given an early projection of 2.1%, the lowest in five years.
• The Federal Reserve expects inflation to be around 2.5% in 2025.
• A survey of economists found a median projection of 2.7% inflation, meaning the 2026 COLA could be higher than 2.1%.

While these numbers will change based on economic trends, retirees should expect a modest COLA increase in 2026.

Benefits

If you’re like many Americans, you may not be fully maximizing your Social Security income. But did you know a few little-known strategies could boost your benefits by as much as $22,924 per year?

Here are some ways to increase your Social Security payouts:

1. Delay Claiming Benefits – Waiting until age 70 can increase your monthly payments by 8% per year after full retirement age.
2. Claim Spousal Benefits – If you’re married, you may be eligible for a higher benefit based on your spouse’s earnings record.
3. Work Longer – Your Social Security payments are based on your highest 35 years of earnings. Working longer replaces low-earning years and boosts your benefits.
4. Avoid Filing Mistakes – Many retirees file too early, missing out on thousands in benefits. Consulting a financial planner can help you maximize your claim.

By learning these Social Security secrets, you can optimize your retirement income and ensure financial security.

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