Social Security is generally the largest source of income in retirement, but many seniors think benefits have fallen behind inflation. The Motley Fool last year surveyed 2,000 retired workers, and the majority said the cost-of-living adjustments (COLAs) in 2024 and 2025 failed to keep up with rising prices.

Unfortunately, beneficiaries will likely receive an even smaller raise next year. The Senior Citizens League, a nonpartisan advocacy group, recently revised its 2026 COLA forecast down to 2.2%. Retired workers have not received a smaller pay increase since 2021. But there may be worse news in store for beneficiaries.

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

Here are the important details.

Image source: Getty Images.

How Social Security’s cost-of-living adjustments are calculated

Retired workers on Social Security get annual cost-of-living adjustments (COLAs) designed to ensure benefit payments increase in lockstep with inflation. Those COLAs are based on a subset of the Consumer Price Index known as the CPI-W, which measures price changes based on the spending patterns of hourly workers.

The math is simple: The third-quarter CPI-W from the current year (July through September) is divided by the third-quarter CPI-W from the prior year, and the percent increase becomes the COLA in the following year. For example, the CPI-W increased 2.5% in the third quarter of 2024, so Social Security benefits received a 2.5% COLA in 2025.

Why the latest COLA forecast is bad news for retirees on Social Security

CPI-W inflation measured 2.7% in February, down from 3% in January. That led The Senior Citizens League (TSCL) to lower its 2026 COLA forecast from 2.3% to 2.2%. But that alone is not a problem because COLAs simply compensate beneficiaries for rising prices. Put differently, the size of the COLA is irrelevant so long as it matches inflation.

The issue lies in the fact that Social Security’s COLAs are based on CPI-W inflation. As mentioned, the CPI-W measures price changes based on the spending habits of hourly employees. But working adults are typically younger than retirees on Social Security, and young people spend money differently than seniors.

Most notably, retired workers typically spend more on housing and medical care, and less on education and transportation. Consequently, the CPI-W misrepresents those spending groups from the perspective of Social Security recipients.

That brings me to the issue with the forecasted 2.2% COLA in 2026: Overall CPI-W inflation fell 0.3 percentage points to 2.7% in February, but housing and medical care prices increased at roughly the same pace as in previous months, and inflation in those groups was above the 2.7% average, as follows:

• The housing component of CPI-W inflation increased 3.7%.
• The medical care component of CPI-W inflation increased 2.9%.

Meanwhile, cost increases associated with education and transportation slowed sharply, and inflation in both categories measured well below the 2.7% average, as follows:

• The education component of CPI-W inflation decreased 0.1%.
• The transportation component of CPI-W inflation increased 1.8%.

In short, the CPI-W puts too little emphasis on housing and medical expenses from the perspective of retirees, and inflation in those categories is running above average. Meanwhile, the CPI-W puts too much emphasis on education and transportation expenses from the perspective of retirees, and inflation in those categories is running below average.

Readers should bear in mind the official 2026 COLA cannot be determined until CPI-W data is available for the third quarter, which won’t happen until October 2025. That means there is plenty of time for inflationary trends to change. But as the situation stands today, the 2.2% COLA forecast by TSCL will be too low.

Consequently, Social Security is on pace to lose buying power next year, which is bad news for retired workers that depend on benefits to make ends meet.

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.