Social Security serves as a crucial income for millions of retired Americans. And in a recent Gallup poll, 23% of retirees called Social Security their only major income source.
But many retirees have been struggling to make ends meet in recent years. And a big part of the reason boils down to rampant inflation.
Living costs started surging in the wake of the pandemic as consumers went out and spent their stimulus checks, driving prices upward. The Federal Reserve stepped in and started raising interest rates in an attempt to cool inflation. But despite its progress, inflation remains elevated even today.
Thankfully, though, inflation has been cooling, so much so that the Fed was finally able to start lowering interest rates toward the end of 2024. And while the Fed more recently paused interest rates following a mild increase in inflation, the hope is that as 2025 chugs along, inflation will continue to moderate.
That’s good news not just for retirees, but consumers on a whole. But it’s also going to impact retirees’ 2026 Social Security cost-of-living adjustment (COLA).
How Social Security COLAs are determined
The purpose of Social Security COLAs is to help ensure that beneficiaries don’t lose buying power from year to year as inflation drives prices upward. For this reason, Social Security COLAs are tied to inflation directly. They’re calculated based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
When there’s an increase in that CPI-W data from one year to the next, a COLA is applied to Social Security. And while it can be argued that the CPI-W is not a great measure of the costs retirees on Social Security face, since it applies to wage earners and clerical workers, for years it’s been the standard.
Meanwhile, based on initial CPI-W data, the nonpartisan Senior Citizen’s League is estimating 2026’s Social Security COLA at 2.3%. And that’s a touch lower than the 2.5% COLA beneficiaries received at the start of 2025.
However, the news there is not all bad. There’s actually a huge silver lining.
Why a 2.3% Social Security COLA isn’t terrible at all
Many seniors on Social Security were disappointed to learn that their monthly benefits would only be increasing by 2.5% in 2025. So it stands to reason that a 2.3% COLA for 2026 won’t sit well at first.
But because Social Security COLAs are tied directly to inflation, a smaller raise indicates that living costs aren’t rising so quickly. And less extreme price increases could give retirees more than a slightly larger boost to their monthly Social Security checks.
When inflation soars, retirees on Social Security often have a tough time keeping up, even though rampant inflation naturally leads to higher COLAs. So what retirees should actually want is slow, steady inflation around the 2% mark — the level the Fed itself feels is most conducive to long-term economic stability.
It’s too soon to get hung up on a number
Because Social Security COLAs are calculated based on third-quarter CPI-W data, it’s clearly too soon to estimate next year’s increase with certainty. If inflation picks up in the coming months, 2026’s COLA could be larger. If it declines, which is what retirees should want, 2026’s COLA might come in at under 2.3%.
But the one thing Social Security recipients need to remember is that larger COLAs are tied to higher price increases, and vice versa. So if 2026’s Social Security COLA does land somewhere in the vicinity of 2.3%, it’s actually not bad news at all.
The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
The $22,924 Social Security bonus most retirees completely overlook
Offer from the Motley Fool: If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.