When you’re creating your retirement plan, chances are good that you’re expecting Social Security to help support you. Social Security benefits are the only guaranteed source of income for many retirees, so they are critical to financial security for many seniors.
One of the best features of Social Security is that benefits adjust automatically to account for inflation thanks to a cost-of-living adjustment (COLA) built into the benefits program. In other words, as prices increase, benefits increase too.
COLAs help ensure that benefits don’t lose buying power over time. Without them, Social Security would buy a little less each year. However, there are some things that every retiree should know about COLAs, given that they may not deliver exactly the protection you might expect against rising prices.
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1. COLA calculations are based on a different inflation index than you might expect
The first thing to understand about COLAs is that they’re based on a consumer price index. The Bureau of Labor Statistics (BLS) collects data on prices over time for goods and services people use in their daily lives. The BLS then creates price indexes to measure inflation.
But the consumer price index used for COLA calculations isn’t the one you might expect. The COLA formula uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W is different from the Consumer Price Index for All Urban Consumers (CPI-U), which is considered the primary measure of inflation and which is more widely reported on by the news media. It’s also different from the Consumer Price Index for Americans 62 and over (CPI-E).
While it may seem like using CPI-E would make more sense, since seniors receiving Social Security aren’t urban wage earners or clerical workers, CPI-W was the only price index in existence when Congress voted to provide automatic benefit adjustments in 1972, so it was chosen by default.
While some have argued that a change should be made, that hasn’t happened for several reasons, including the fact that CPI-E is experimental, has higher sampling errors, and would result in larger raises that could result in Social Security running out of money sooner.
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2. The third quarter is the critical quarter for COLA calculations
Retirees should also know that a full year’s data isn’t included in the COLA calculations. Onlythe third quarter data counts.
Specifically, the COLA equals the average change in the CPI-W for the third quarter (July, August, and September) compared to the same period in the prior year. That’s why retirees don’t know their COLA for the upcoming year until October.
3. COLAs aren’t guaranteed to happen every year
While retirees may assume COLAs are something that happens every year, this is also not the case. You only get a benefits bump from the COLA if prices are rising. And that doesn’t always happen.
In fact, retirees did not get a COLA in 2010, 2011, or 2016. Consumer prices fell during those years, so there was no reason to give retirees a benefits increase.
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4. Your COLA can’t reduce benefits
While you aren’t guaranteed to get a COLA each year, the good news is that when prices go down, your benefits aren’t lowered. They can only go one way, so seniors don’t need to worry about a big recession or a bad economy causing a decline in their Social Security checks.
5. Medicare premiums can make your COLA disappear
Many seniors are surprised each year to discover their Social Security checks don’t increase by the exact amount of the COLA. But, there’s a reason. Most seniors 65 and over have Medicare premiums taken from their benefits. And, when Medicare premiums go up, this eats into the COLA.
In 2026, for example, retirees get a 2.8% COLA. But, Medicare premiums rose from $185 to $202.90. This meant if a retiree on Medicare got a $50 COLA increase, they’d only see their payments go up by $31.10 thanks to the Medicare premium increase.
There’s more good news, though. For most beneficiaries, if the Medicare Part B premium increase is larger than the COLA, the hold harmless provision kicks in — your net Social Security benefit won’t go down, but your COLA may be partially or fully absorbed by the premium increase.
6. COLAs aren’t doing a good job of keeping pace with inflation
While COLAs are supposed to ensure benefits don’t lose buying power, they aren’t doing a great job. The CPI-W doesn’t perfectly measure the cost increases that seniors experience.
Seniors tend to spend more on things like health care, which is undercounted in the CPI-W, so the actual inflation they face each year is higher. The result is that benefits have lost around 20% of buying power since 2010, according to The Senior Citizens League.
This is the most critical thing for seniors to know, as it means they must prepare for their benefits to decline in value over time so they don’t find themselves struggling late in life.
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Bottom line
Now you have a much deeper understanding of how the COLA works, how it impacts your finances, and what the inflation adjustment actually does for you. Keep in mind it’s not perfectly keeping pace with inflation, which means Social Security benefits may buy less over time. Planning ahead for that gap is important.
To have a truly stress-free retirement, supplementing Social Security with savings is key. Workers should be investing in their future now, while current retirees should maintain a safe withdrawal rate from their retirement accounts to make sure their money lasts.
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