August 15, 2023 marked the annual Cost-of-Living Adjustment (COLA) announcement, and retirees are bracing themselves for a 3.4% increase in their Social Security benefits. However, estimates for 2026 suggest a relatively modest 2.9% COLA, leaving many retirees wondering if they’ll be able to make ends meet. Experts note that this COLA may not keep up with inflation, which could negatively impact retirees’ purchasing power.
The rising cost of living, healthcare expenses, and mortgage payments are among the concerns facing retirees. With a growing number of retirees living longer, their savings may not suffice to cover these expenses. According to a Kaiser Family Foundation report, the number of Americans aged 65 and over is expected to reach 73.1 million by 2030, accounting for 19% of the total US population.
What is the COLA and How Does it Work?
The Cost-of-Living Adjustment is a bureaucracy that adjusts Social Security benefits annually to account for inflation. This increase is calculated by the Department of Labor’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The formula for determining COLA benefits includes the Annual Wage Growth Rate, Healthcare and Prescription Drug Expenses, and other factors.
Each January, the Social Security Administration reviews CPI-W data from the previous year to determine if a COLA is warranted. If the inflation rate is higher than 2% over a 12-month period, a COLA kicks in. Once the increase is calculated, it is then applied to Social Security benefit checks in the following year.
What to Expect in 2026?
Projections for the 2026 COLA are based on forecasted inflation rates and economic trends. As of April 2023, the Bureau of Labor Statistics (BLS) reported a 6.1% YoY (year-over-year) inflation rate. While this is lower than the 12.2% rate in June 2022, it still translates to a significant increase in COLA earners’ pockets.
While a 2.9% COLA may seem generous at first glance, retirees note that the sooner-buying power in the US is decreasing rapidly, partly due to medical expenses and increasingly priced everyday items such as housing, food, and energy bills.
How Does it Affect Retirees?
Retirees primarily count on their Social Security checks to cover all or the majority of their living expenses. In reality, real buying power can diminish in the years following retirement
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