Millions of Americans who rely on Social Security wait for a specific yearly announcement, and that is to find out how much their benefits will increase in the next year. This yearly increase is known as the cost-of-living adjustment (COLA). The COLA is meant to help retirees keep up with the rising costs of inflation. However, there are many who still feel like the COLA is not enough to keep up the increasing costs.
There is a major change that could increase COLAs in most years. The problem? It’s extremely unlikely to happen anytime soon.
Why COLAs Don’t Always Match Real-Life Costs
As it stands, the COLA is calculated based on Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W tracks the spending pattern of employed individuals.
This is already a red flag because:
- The CPI-W does not take into consideration retirees spending.
- The elderly population spend money much differently as compared to those who are working.
- Retirees spend more on housing, medical care and medication.
The Proposed Change: Use CPI-E Instead
In order to solve this problem, many experts have suggested that Social Security use the Consumer Price Index for the Elderly (CPI-E) to calculate the COLA.
This index is more accurate as it tracks the spending pattern of adults who are aged 62 and over. It shows that seniors spend more of their money on healthcare.
Would Switching to CPI-E Increase COLAs?
Research shows that yes, switching to the CPI-E would result in slightly higher COLAs in most years. But the key word here is slightly.
For instance, inflation throughout the whole economy would have to soar in order to achieve a 10% COLA. Therefore, although moving to the CPI-E might make things better, it is not a magic bullet.
Why the Government Isn’t Making the Change
- Higher COLAs Cost the Program More
It’s important to remember that even small COLAs add up over time. If retirees get higher benefits, it means that Social Security has to more over the years, and this may be a problem because the program is already struggling to keep up.
- Social Security Is Running Out of Time
According to a recent Social Security Trustees Report, the programs trust fund is expected to be run out by 2033 if no changes are made.
Should this happen, benefits will be decreased.
- Congress Can’t Agree on Reforms
To change how COLAs are calculated, Congress must pass new legislation.
Could Congress Approve a One-Time Extra COLA?
The other idea is if Congress allows for a one-time COLA increase. This will allow more breathing room for retirees (financially) for a year, especially if inflation is high. However, this would still cost billions.
What Retirees Can Do in the Meantime
Since higher COLAs are not guaranteed, retirees may need to explore other ways to strengthen their finances.
- Retirees should ensure that they use their retirement savings carefully. Planning withdrawals can help in ensuring the money lasts longer.
- Since the cost of living is constantly increasing, retirees can look into part-time work or consulting. This will allow for additional income that can be used to cover essential expenses.
- Start Preparing for 2026 Early
It’s a good idea for Social Security beneficiaries to check their finances and get ready for the next year. When January rolls around, you’ll be more prepared if you know how much money you’ll have in 2026.
Final Thoughts
Using the CPI-E index would make more sense as it reflects a more accurate spending pattern of retirees, however the change is unlikely because of the financial situation of Social Security as well as political disagreements.
With that being said, it’s important for retirees to plan ahead, budget accordingly and ensure that they keep themselves updated.