The effects of inflation impact us all regardless of income bracket, or income source. However, for those on a fixed income like Social Security, high inflation rates could prove to be a huge problem since costs are increasing, yet the buying power of a monthly benefit remains stagnant. In order to aid this issue, the Social Security Administration has a Cost of Living Adjustment (COLA) added to Social Security benefits each year.
For 2025, the Cost of Living Adjustment was 2.5% meaning that Social Security beneficiaries will have received a 2.5% bump to their benefit amount for the year, starting in January. However, it has been suggested that the annual COLAs are not sufficiently accounting for the effects of inflation and as a result, the elderly are not able to maintain their standard of living as well as they should be with the adjustment.
How is the Social Security COLA calculated?
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the year is compared to the CPI-W of the same period for the previous year. If there is an increase from the previous year to the current year, the increase percentage becomes the COLA for the upcoming year. For 2025, the COLA was 2.5%. Early predictions for the 2026 COLA are currently standing at around 2.5% as well, according to the nonpartisan Senior Citizens League.
Is the COLA enough to combat inflation?
Once the COLA increase is added to the Social Security amount each year, it becomes permanent, meaning each year’s COLA is added on to the previous year’s COLA. Since 1975, there have only been three years where the COLA was calculated to be 0.0% and this occurred in the years 2010, 2011, and 2016. Despite receiving a 2.5% bump to their monthly benefit check, many retirees did not actually see a complete 2.5% increase to their total. The cause behind this can be attributed to the increase in Medicare premium since these premiums are automatically deducted from the benefit amount.
In order for the COLA increase to effectively fulfill its purpose, year over year price increases need to match or be lower than the percentage by which the benefit was adjusted (which is 2.5% for this year). This is measured by taking key areas such as food, shelter, energy, etc., costs into account. For 2025, however, it appears that the COLA is not measuring up in four key areas.
Listed below is the Bureau of Labor Statistics Consumer Price Index data for a five key areas, the measurement of which is the percent changes in CPI for All Urban Consumers (CPI-U):
- Food: The cost of food away from home increased by 2.9% over the last year (measured by the 12-month period ending in May of 2025)
- Shelter: The cost of shelter increased by 3.9% year over year
- Medical care services: Medical care costs increased by 3.00% year over year
- Energy prices: Energy costs decreased by 3.5%
- Transportation: Costs of transportation increased by 2.8%.
The issues with the COLA in relation to its ability to maintain the buying power for the income of retirees lies in the fact that the data used to calculate the COLA is focused on a much younger cohort. The CPI-W collects data from urban wage earners and clerical workers and these cohorts have vastly differing spending habits when compared to retirees.
“Inaccurate or unreliable data in the CPI dramatically increases the likelihood that seniors receive a COLA that’s lower than actual inflation, which can cost seniors thousands of dollars over the course of their retirement,” said Shannon Brenton, Director of The Senior Citizens League.
“Seniors should be concerned as inflation continues to tick upward. TSCL’s research shows that there’s a serious disconnect between the inflation the government reports and the inflation that seniors experience every day,” Benton added. “If the government tells us that prices are rising faster, it’s likely that seniors are already feeling the crunch.”