Social Security benefits are an essential source of income that allows many retirees to make ends meet. However, since inflation remains as persistent and fickle as ever, these retirees are entirely dependent on annual cost of living adjustments (COLAs) to ensure that their payments are able to withstand the effects of inflation.
If these COLAs are not substantial enough, the benefits will lose purchasing power and as a result, the recipients of Social Security will receive less money.
What is the upcoming COLA forecast?
It was recently revealed that The Senior Citizens League, a nonprofit and nonpartisan senior advocacy group, has increased its 2026 COLA forecast to 2.3%. The previous estimate stood at 2.2%, making this raised revision come as somewhat of a surprise due to the inflation reading for March being at its lowest since September.
Now, whilst this slight uptick may appear to be good news at a surface level, if trends in the underlying inflation data are to be believed, the purchasing power of Social Security benefits are quite probable to lose purchasing power by next year — posing an obvious problem for retirees.
In order to determine the cost of living adjustments, the CPI-W, which is a subset of the Consumer Price Index, is used. The calculation is rather simple, “the average CPI-W reading in the third quarter of the current year (July to September) is divided by the average CPI-W reading from the third quarter of the previous year.” If a percent increase is produced from this calculation, it will become the COLA in the next year.
However, the problem with this factors in when considering how CPI-W inflation is tied to the spending habits of working adults. The age gap between these working adults and the retirees who receive Social Security benefits is generational, meaning that the spending habits of the two groups are also vastly different. As such, the CPI-W is not the most accurate point of reference when determining pricing pressures for these Social Security benefits recipients.
Due to the age gap between the working adults and retirees, the focus points on the CPI-W does not relate well to the older cohort. The index is based on hourly workers’ habits and as such, it does not put sufficient emphasis on housing or medical care, whilst also showing a strong emphasis on transport.
How will this impact the purchasing power of Social Security benefits?
For March 2025, a 2.2% CPI-W inflation deceleration was recorded. This marked the lowest reading since September 2024, however, medical car and housing prices both increased by 2.7% and 3.7% respectively. Additionally, transportation showed a 1% decline. Simply put, for underweight spending categories, price increases trended above average and parallel to this, overweight spending categories were recorded to be below average.
This pattern has been consistent for the first three months of 2025. As such, the average year to date changes in the overall CPI-W, as well as select spending categories are listed as follows:
- CPI-W (all categories): 2.6%
- Housing: 3.7%
- Medical care: 2.8%
- Transportation: 1.4%
As seen above, the CPI-W recorded a 2.6% average for the first three months of 2025, with housing and medical care expenses increasing rapidly, whilst transportation expenses showed a slower rate of increase. From the perspective of retired Social Security beneficiaries, these inflation readings are likely to be underestimated. The fallout from this? The Social Security benefits are on a set path that will lead to it losing some of its purchasing power by next year.
Alternatively, this estimation can also be checked using the CPI-E which is another subset of the CPI that is determined using the spending habits of individuals who are aged 62 and older. “CPI-E inflation was 2.9% during the first three months of 2025, topping CPI-W inflation by 0.3 percentage points.”
Drawing from these figures, it becomes quite evident that the CPI-W underestimates inflation for retired workers and as such, it is more than likely that the 2026 COLA will not be sufficient.