The Truth Behind How Social Security's Annual COLA Increase Is Calculated

Entering 2026, the new retirement contribution rules for upper-class seniors aren’t the only income-related changes coming for older Americans: Social Security benefits are also changing. Beginning in January, retirees and individuals on Supplemental Security Income (SSI) will see their benefits rise by 2.8% thanks to Social Security’s 2026 cost-of-living adjustment (COLA) increase. For the average retiree, this means an additional $56 should show up in their monthly benefits check, per the Social Security Administration (SSA).

The annual COLA is calculated based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks how working-age individuals in urban areas spend their money on various goods and services including groceries, clothing, and travel. However, the current method to calculate COLA adjustments may not be ideal for retirees as it falls short of the adjustments seen during high inflationary periods. While the most recent increase does fall in line with the average COLA increase of the past few decades, many recipients are still unsatisfied with the shift. So, some folks are beginning to question how the increase is calculated and whether there is a better method to offset inflation.

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The COLA follows the United States annual inflation rate pretty closely, which was calculated at 3% as of September 2025, according to the Bureau of Labor Statistics. However, that’s not the only data the SSA looks into to determine COLA increases. To determine the COLA for the coming year, the SSA compares the average CPI-W of the third quarter of the current year with the average CPI-W from the third quarter of the last year a COLA was applied. If that calculation shows an increase, the SSA raises benefits by whatever percentage that measurement went up.

While the CPI-W is a solid inflation tracker in many cases, it has a few drawbacks that greatly affect retirees. Possibly its biggest downside is that the index is a snapshot into the spending habits and purchasing power of working-age households, not seniors or retirees. For example, seniors spend more of their income on healthcare and housing than younger people, and that may not be reflected in the CPI-W or factored into the cost-of-living adjustment. Additionally, seniors still need many of the items factored into the CPI-W, but since they’re no longer working, even those necessities could take up a larger portion of an individual retiree’s income than the SSA’s calculations will accommodate.

With many people and advocacy groups highlighting the issues of the current CPI-W-based COLA, there is interest from politicians to rework the system altogether. For example, Senator Bernie Sanders introduced the Social Security Expansion Act to switch COLA calculations to be based on the Consumer Price Index for the Elderly (CPI-E) instead of the CPI-W. The CPI-E specifically tracks the costs and expenses for seniors aged 62 and older, and is often higher than the CPI-W. By switching the COLA calculation to the CPI-E, it’s likely retirees would preserve their purchasing power by receiving higher monthly benefits.

Another measure picking up steam is the Social Security Emergency Inflation Relief Act, introduced by Senator Elizabeth Warren. The bill would provide an additional $200 in benefits for the first six months of the year. The additional income would be tax-free and come in addition to the annual COLA adjustment. The bill’s goal would be to help retirees keep up with inflation. Whether either bill is signed into law remains to be seen, but the issue is getting more timely with each passing year. At this point, nearly half of all individuals who retire at 65 will likely run out of money.

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