Social Security: What is COLA and How Does it Work?
As the Social Security Administration (SSA) is required by law to prevent inflation from eroding the purchasing power of benefits paid to recipients, they in turn make cost-of-living adjustments (COLA): automatic benefit increases.
In this post, we’ll review how COLA is calculated, highlight some historical data, and explain why—even with COLA—the purchasing power of Social Security has declined over time.
Key Takeaways
- What it is: The Social Security cost-of-living adjustment (COLA) is an automatic annual benefit bump designed to protect purchasing power from inflation.
- How it's calculated: The SSA compares the CPI-W in the third quarter of the current year to the same period a year earlier — the 2026 COLA is 2.8%.
- Timing: The SSA announces the adjustment each October, notifications go out in December, and the higher check arrives in January. COLA can be zero but never negative.
- Purchasing power gap: The CPI-W underweights the categories retirees actually spend on — Social Security has lost 13.7% of buying power since 2016, per the Senior Citizens League.
- Medicare tension: Part B premiums rise faster than COLA. The "hold harmless" rule shields some recipients from Part B hikes reducing their check, but income limits and Medicaid exceptions apply.
How COLA is calculated
Cost-of-living adjustments are based on the Consumer Price Index (CPI-W), an estimate of the average change in how much goods/services cost that are purchased by households whose income is earned primarily via hourly wages and clerical work. The index loops in more than 200 consumer products across housing, food and beverage, apparel, transportation, and healthcare categories (and more!).
The Bureau of Labor Statistics calculates these adjustments on a monthly basis, with the Social Security Administration then announcing them every October. Recipients typically see the corresponding benefit beginning in January of the following year.
COLA increases are not guaranteed, nor is COLA ever negative. With respect to how the program works, Social Security benefits rise if there is a measurable increase (0.1% or higher) in the price index from year to year—or, more specifically, between average prices in the third quarter of the current and previous year.
For example, the average CPI-W was 308.729 for Q3 2024. During this same period in 2025, the CPI-W was 317.265: reflecting an increase of 2.76%. As a result, Social Security recipients received a cost-of-living increase of 2.8% in 2026.
History of COLA increases by year
Social Security benefits at one time only increased if and when Congress enacted special legislation; but when the U.S. enacted the COLA provision in 1972, annual COLAs commenced in 1975 (with the law stipulating automatic increases only if the Consumer Price Index rose by at least 3%). In 1986, Congress eliminated the 3% trigger and thus tied COLAs directly to the Consumer Price Index.
Since then, only three years—2010, 2011, and 2016—didn’t see benefits rise at all. The biggest increase (in 1980), meanwhile, triggered a 14.3% boost for Social Security recipients.
COLA and purchasing power
While the COLA concept may sound great on paper, Social Security’s purchasing power has actually eroded over time. Why? Because the CPI-W underweights specific sectors that are hit with very steep prices including prescription drugs, homeowners insurance, property taxes, and fresh fruits and vegetables. What’s more, different indexes are used to measure Medicare and Social Security adjustments, resulting in a faster rate of increase for Medicare premiums.
For example, between 2000 and 2018, Social Security COLAs averaged a 2.2% annual increase: considerably less than the 6.1% annual rise in standard Medicare Part B premiums. While the hold harmless provision (a law that prohibits Medicare Part B premiums from reducing Social Security benefits) protects some beneficiaries, it doesn’t cover everyone and is far from perfect; see the forthcoming FAQs for additional clarity about this topic.
According to the Senior Citizens League—one of the nation’s largest nonpartisan senior groups—Social Security benefits have lost 13.7% of their buying power since 2016 and recipients would need an extra $295.85 more per month to maintain the same level of buying power they had back in 2016.
Furthermore, the League also found that between 2010 and 2024, COLAs raised Social Security benefits by about 58%—while the cost of goods and services typical retirees actually buy rose roughly 73% over the same stretch.
These are just some of the reasons why you shouldn’t depend solely on Social Security to fund your retirement.
In sum: COLA and Social Security impacts
Questions about COLA and Social Security? Schedule a FREE discovery call with one of our CFP® professionals today!
Reviewed for accuracy
Paul Muller, AEP®, CFP®
Founder and Relationship Manager at Vision Retirement, with 30+ years in the financial industry.
Read full bio →FAQs
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Yes, each and every individual who receives Social Security retirement benefits is eligible for the cost-of-living adjustment (COLA)—designed to protect the value of benefits against the effects of inflation—on an annual basis.
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While the Social Security Administration typically announces COLA increases every October, Social Security recipients receive corresponding notifications in December.
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To qualify for the hold harmless rule, you must be a Social Security recipient and earn a modified adjusted gross income (MAGI) below the IRMAA surcharge threshold—for 2026, that's less than $109,000 for individuals and $218,000 for married couples filing jointly (based on your 2024 income). You're also required to be enrolled in Medicare Part B and have had end-of-year and beginning-of-year premiums deducted from your Social Security check (in December of the previous year and January of the current one). Note you won't qualify for the hold harmless provision if your state Medicaid agency pays your Medicare premiums.
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If you qualify for the hold harmless rule (see the previous question), this will ensure your Medicare Part B premiums do not exceed a cost-of-living increase in any given year (e.g., if the Medicare Part B premium increase causes your Social Security check to reflect a lower amount than the year before, your Medicare Part B premium would simply be reduced to ensure your Social Security check stays the same).
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The Social Security Administration announced that the 2026 COLA will ring in at 2.8%.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
