In January, nearly 52 million retired-worker beneficiaries took home an average Social Security check of $1,978.77. Though this is a relatively modest monthly payout, it has historically proven vital to helping retirees make ends meet.

Over the last 23 years, the survey-takers at Gallup have polled retirees to gauge their reliance on their Social Security income. What all 23 surveys have shown is that 80% to 90% of respondents require at least some portion of their payout to cover their expenses.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

Considering how foundational Social Security is to the financial well-being of our nation’s aging workforce, it should come as little surprise that the annual cost-of-living adjustment (COLA) reveal is the most-anticipated announcement each year. Though we’re still more than seven months away from this official unveiling, a recent update to the early 2026 COLA projection presents a mixed bag for retirees.

Image source: Getty Images.

Why is Social Security’s COLA so important for retirees?

Social Security’s cost-of-living adjustment is the mechanism the Social Security Administration uses to align benefits with inflation (i.e., the rising price of goods and services).

Hypothetically, let’s assume that the average cost for a large basket of goods and services regularly purchased by seniors increases by 3% from one year to the next. If Social Security benefits remained static, the buying power for seniors would decline and they would be unable to purchase as much with their Social Security checks. The COLA is the tool that attempts to keep benefits in line with the rising price of goods and services.

From the first retired-worker payout in January 1940 through 1974, there was no rhyme, reason, or formula for making these adjustments. Rather, special sessions of Congress arbitrarily passed along increases. This resulted in retired-worker beneficiaries receiving the largest COLA in history — 77% in 1950 — following no adjustments during the entirety of the 1940s.

Starting in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers, better known as the CPI-W, became the annual inflationary measure used to calculate the COLA. The CPI-W has more than 200 weighted spending categories, and these percentage weightings allow it to be expressed as an easy-to-understand single figure to determine whether prices are collectively rising (inflation) or falling (deflation).

Although the CPI-W is reported monthly by the U.S. Bureau of Labor Statistics (BLS), only readings from the third quarter (July through September) are used in the COLA calculation. If the average CPI-W reading from the third quarter of the current year has increased from the comparable period of the previous year, inflation has occurred and beneficiaries are due a raise.

A big increase in the prevailing rate of inflation sent COLAs soaring in recent years. U.S. Inflation Rate data by YCharts.

The 2026 cost-of-living adjustment estimate was just updated

Throughout the 2010s, Social Security COLAs weren’t much to write home about. The only three periods of deflation over the last half-century resulted in no COLA being passed along in 2010, 2011, and 2016. Meanwhile, 2017 marked the smallest positive COLA in the program’s history at 0.3%.

But due to a rapid increase in U.S. money supply, which was spurred by the COVID-19 pandemic, the prevailing rate of inflation soared to a four-decade high in recent years…and so did cost-of-living adjustments. Respective raises of 5.9% in 2022, 8.7% in 2023, 3.2% in 2024, and 2.5% in 2025, all came in above the average COLA of 2.3% since 2010.

Following the release of the January inflation report from the BLS, nonpartisan senior advocacy group The Senior Citizens League (TSCL) increased its estimate for the 2026 COLA from 2.1% to 2.3%. This would result in the average retired-worker check increasing by approximately $46 per month next year.

Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, foresees the 2026 COLA coming in at 2.1%.

The catalyst that spurred TSCL to update its 2026 COLA forecast is a modest reacceleration in the prevailing rate of inflation. The Consumer Price Index for All Urban Consumers (CPI-U), a similar inflationary measure to the CPI-W, jumped by 0.5% in January, which is the largest sequential monthly increase since August 2023. On a trailing-12-month basis, the CPI-U has increased by 3%.

If energy inflation were to reaccelerate, as it has in each of the previous two months, and food costs were to pick up, it’s quite possible we could witness Social Security’s COLA notably increase from TSCL’s and Johnson’s latest forecasts.

Image source: Getty Images.

Social Security’s COLA is a give and take (but often with more taking than giving)

On one hand, the prospect of a higher-than-expected cost-of-living adjustment next year is likely to sit well with retirees. On a nominal basis, the 2026 COLA should make history by pushing the average monthly retired-worker check above $2,000 for the first time.

However, Social Security’s COLA is a give-and-take mechanism that tends to do far more taking than giving.

While a higher COLA might sound great on paper, the annual raises passed along to beneficiaries in most years are missing the mark and resulting in losses of purchasing power.

For example, let’s assume TSCL’s higher estimate proves accurate and the 2026 COLA is revealed to be 2.3%. The problem is that the two expenses that account for a disproportionately higher percentage of seniors’ budgets — shelter and medical care services — are seeing costs rise at an even faster pace.

Based on January CPI-U data, shelter expenses rose by 4.4% on a trailing-12-month basis, while medical care services jumped by 2.7% over the same span. As long as the prevailing rate of inflation for the costs that matter most to retirees is climbing at a faster pace than the estimated/announced COLA, retirees are set to lose buying power.

In July 2024, TSCL released a report that estimated the buying power of a Social Security dollar had declined by 20% since 2010. A separate TSCL report from May 2023 calculated a 36% loss of purchasing power from 2000 through February 2023.

The point being that a modestly higher COLA, or even one that surpasses the average COLA over the last 15 years, more than likely isn’t going to be enough to offset the steady loss of buying power for Social Security income that retirees have been contending with since this century began.

The $22,924 Social Security bonus most retirees completely overlook

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.

View the “Social Security secrets” »

The Motley Fool has a disclosure policy.