Every year the Social Security Administration (SSA) makes adjustments to Social Security benefits; this is referred to as the Cost-of-Living Adjustment (COLA). The COLA for 2026 has been concluded to be 2.8%. This simply means that the average Social Security beneficiary will receive approximately $56 more in benefits (per month). Now, at first this may sound like great news, but for much of the elderly population, this increase won’t go that far.
The reason is simple: the way the government calculates inflation doesn’t match how retirees actually spend their money.
The Incorrect Formula Behind the COLA
The SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate benefits. This index tracks the spending pattern of working-class Americans and not retirees.
Retirees spend money very differently from working families. That’s where the problem starts.
Older adults spend a much bigger portion of their income on things like:
- Housing and utilities
- Healthcare
- Medication
In contrast to this, the CPI-W focuses more on things such as commuting and clothing. This simply means that the COLA is based on an index that does reflect the financial reality of retirees.
The Rising Cost of Healthcare Eats Up the “Raise”
For retirees, one of the major expenses is healthcare, this is increasing much faster than anything else.
There are number of Americans who rely on Medicare for their health insurance. Medicare premiums are deducted directly from Social Security checks, and these premiums are expected to increase next year as well.
That means more than one-third of the average $56 COLA increase will immediately go toward paying that higher Medicare premium.
Therefore, even though Social Security benefits will increase in January, most seniors’ monthly budgets won’t really improve.
Why Seniors Feel Left Behind
Many retirees are concerned that the prices of goods and services and increasing much fast than benefits are increasing.
In simple terms:
- The government uses an outdated inflation index. The CPI-W does not reflect how retirees spend.
- The costs of essential goods and services is increasing much faster than the average inflation rate. Things such as the cost of housing and electricity is increasing much faster.
- Healthcare costs are also constantly increasing. Medicare premiums strain Social Security benefits.
What Experts Say Needs to Change
There are many experts who are requesting that the method of calculating COLA be relooked at. What they suggest is the Consumer Price Index for the Elderly (CPI-E) instead of the CPI-W.
The CPI-E is an index that reflects a more accurate spending pattern of seniors, those aged 62 and above. It highlights things such as medical care as well as housing costs, this is what retirees spend most of their money on.
Most seniors would probably receive bigger yearly changes that more closely reflect actual pricing if the government adopted this method. However, after decades of discussion, Congress has yet to make the change.
Until that happens, Social Security benefits will continue to lose buying power, even with small yearly raises.
The Bottom Line
Yes, no matter what, an increase is an increase and every bit counts. However, its unfortunate that the COLA increase is calculated using data from working-class Americans rather the people who really depend Social Security, the seniors.
The $56 monthly increase isn’t much when you factor in expenses such as Medicare premiums, housing, groceries and utilities. That increase will quickly be drained out.
A more accurate COLA will be possible if the CPI-E index is used as this reflects the accurate spending pattern of seniors. Until then, beneficiaries are urged to keep themselves updated with verified information and make proactive decisions to secure their financial future.