After much anticipation, the Social Security Cost-of-Living adjustment (COLA) was announced on the 24th of October. Millions of Americans can be relieved that the COLA for 2026 will be 2.8%. This value is slightly higher than this year’s increase which was 2.5%.
There are millions of American retirees who rely on Social Security payments as their primary source of income and every bit of extra income, counts. However, many experts are worried that the increase won’t help as much as it should, especially for seniors who spend more on housing and medical care than younger Americans.
How Social Security Decides the COLA
The yearly COLA is meant to help the elderly keep up with the rising costs of the economy. The Social Security Administration (SSA) calculates this number using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The problem with the CPI-W, is that it tracks spending of working-class people and not retirees. Therefore, it doesn’t reflect the accurate spending of retirees.
Why the Formula Doesn’t Work Well for Seniors
The average person spends around 42% of their income on housing and 7% on healthcare, according to the CPI-W. However, those figures are far higher for seniors, roughly 48% for housing and 11% for healthcare.
Yes, this difference does matter. Retirees find it more difficult that the CPI-W actually suggests.
In simple terms, even though Social Security benefits are going up, they may still not keep pace with the real cost of living for older Americans.
A Better Option: The CPI-E
The slightly better option would be to calculate the COLA using the Consumer Price Index for the Elderly (CPI-E).
The CPI-E reflects the spending pattern of the elderly population (62 years and older) more accurately. Research suggests that using the CPI-E would have meant that retirees receive a slightly higher COLA over the past years.
Now, on paper this may not sound like a lot, but it’s important to remember that over time, it equates to a fair amount in extra benefits. Unfortunately, no approval to use the CPI-E has been made yet, so the current calculation still stands.
How the 2.8% Increase Will Affect Retirees
Social Security beneficiaries may not see such a large increase, but every little bit counts, especially in a time where the cost of goods and services are constantly rising.
For instance, the 2.8% COLA won’t be sufficient if rent rises by 6% and medical expenses climb by 9%. Additionally, Medicare Part B premiums, which are automatically subtracted from Social Security benefits, frequently increase, lowering seniors’ real take-home pay.
Steps Retirees Can Take
Even though retirees can’t control how the government calculates COLA, they can take a few practical steps to stretch their benefits:
- Make sure you go through your Medicare plan and see where you could save on premiums.
- Make sure you budget every month and know exactly what you are paying for.
- Consider low-risk savings or investments.
- If you are planning to withdraw from your retirement savings, make sure you plan effectively to avoid unnecessary taxes.
The Bottom Line
Many seniors are happy about the 2.8% Social Security increase as it is the highest average increase in the last few decades. Regardless of little or how much, every bit counts. Unfortunately, the cost of housing and medical care continues to increase so it might be difficult to keep up with expenses.
Retirees are urged to look into other saving options and not rely solely on Social Security as this will assist with financial stability. Be sure to plan ahead and budget accordingly so that you have money to cover your essential expenses.