Social Security COLAs – 6 Important Things Retirees Must Know and How They Affect Your Income

Social Security COLA: Inflation protection for retirees

Millions of people in the US depend on Social Security benefits for their retirement income. Currently, the average retiree receives about $1,975 every month. This pension provides an economic security for them.

• Most importantly, Social Security is one of the few income sources that increases in line with inflation.
• This increase is due to the Cost-of-Living Adjustment (COLA), which is decided every year based on the inflation rate.

Now the question arises, how is COLA decided and what can be expected next? Let’s understand in detail.

How is COLA calculated?

Many people know that COLA is based on inflation, but not many people know how it is calculated.

• Every year, the Social Security Administration (SSA) looks at the inflation data for July, August and September.
• The Consumer Price Index (CPI-W) data of these three months is compared with the data of the same period of the previous year.
• If inflation increases, then the Social Security pension is increased.
• This is the reason why COLA is announced in October, because during this time the inflation data of September comes.

But this figure does not necessarily reflect the inflation rate of the whole year.

• Example: The average inflation rate in 2024 was 2.9%, but the base of COLA was kept at only 2.5%.

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Method of calculating inflation rate

The SSA uses “CPI-W” (Consumer Price Index for Urban Wage Earners and Clerical Workers) to calculate COLA.

But there is a problem with this:

• CPI-W is based on the expenses of working Americans, not on the needs of retirees.
• Retired people spend more on health care and medicines, but this is not taken into account in CPI-W.
• Some experts believe that “CPI-E” (Consumer Price Index for the Elderly) should be used in calculating COLA, as it better reflects the expenses of the elderly.

• Currently, CPI-E is not included in the COLA calculation.

When does COLA apply?

Many people call COLA as 2025 COLA, but this is technically incorrect.

• The COLA fixed for 2025 (2.5%) actually comes into effect from December 2024.
• But since Social Security payments are made with a delay of one month, retirees get the increased pension in January 2025.

• So COLA is announced in October, implemented in December, but payment comes in January.

What happens if inflation goes down?

Can Social Security pensions go down if inflation goes down?

• No! COLA is never negative.
• Even if inflation falls, Social Security amounts are not reduced.
• If the CPI-W shows negative growth, COLA is kept at 0%, but there is no reduction in pension.

There have been three instances since 1975 when COLA was 0%.

Inflation fell in 2009, but there was no reduction in COLA.

COLA rates in history

COLA rates have fluctuated a lot since 1975.

Year Highest COLA Lowest COLA Average COLA (1975-present) Average COLA over the last 10 years

1980 14.3% 0% (three times) 3.75% 2.6%

• Over the last 10 years, the average COLA increase has been only 2.6%, which is lower than before.

COLA projections for 2026

It’s hard to say right now what the COLA will be in 2026, because it depends entirely on the inflation rate in the third quarter.

But here are some preliminary estimates:

• The “Senior Citizens League” has estimated that the 2026 COLA may be only 2.1%, which would be the lowest increase in the last 5 years.
• The Federal Reserve estimates that inflation will be around 2.5% in 2025.
• A survey of economic experts put the average estimate at 2.7%, so the 2026 COLA could be slightly higher.

• It’s too early to say how much the COLA will be, but a big increase is unlikely.

How can you increase your Social Security income?

• Many people don’t take full advantage of their Social Security benefits.
• But a few smart strategies could boost your annual pension by up to $22,924!

Claim late:

If you delay claiming your pension and wait until age 70, your monthly pension could grow by up to 8% each year.

Take advantage of a spouse’s pension:

If you’re married, you may be eligible for a higher pension based on your spouse’s earnings.

Work long enough:

• Social Security is based on the average of your highest-earning 35 years.
• If you underearned in some years, you can increase your average by working more years.

Avoid mistakes:

• Many people apply for a pension too early, which can cost them thousands of dollars.
• Applying on time with advice from a financial expert is the best way to go.
• With these smart tips, you can maximize your Social Security benefits and secure your retirement.

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Important questions and answers (FAQs)