The Consumer Price Index (CPI) tracks a basket of goods, as measured by government officials. The corresponding price increases for these goods factor into the overall CPI, which is used as a broad measure of inflation for those at the Federal Reserve and other agencies to determine the rate at which prices are rising (or falling) over time.
As all investors should be aware, inflation remains a core problem for both the Fed and investors looking to forecast where specific companies and industries are headed. If inflation stays elevated above the Fed’s 2% target for too long, interest rates could remain higher for longer, slowing overall economic growth in the U.S. (and by default, around the world).
In contrast, if inflation continues to come down and rates follow, we could be due for another boom ahead. For retirees and those on social security, that would be great for their retirement portfolios.
That said, there are other impacts to be considered for baby boomers wondering how their social security cost of living adjustments (COLA) may change over time. Let’s dive into what these recent data suggest could be ahead in 2026 in terms of seniors’ COLA they can expect.
Cost of Living Adjustment Could Be Higher Than Previously Thought
Cost of living visual
We’re probably not going to go back to the 2022/2023 COLA increase rates any time soon. When inflation was skyrocketing during those periods, seniors saw an impressive boost in their social security payments of more than 8%, a rate I don’t think anyone at the government or White House wants to see (given the ultimate impact on the debt situation domestically).
That said, with the most recent CPI reading coming in hotter than expected, economists have broadly raised their expectations for what the 2026 cost of living adjustment will come in at. A poll of prevailing experts on where the COLA increase for 2026 will come in at now estimate the increase will be around 2.6%, up from 2.5% prior to this reading.
Now, the ultimate increase won’t be announced until next quarter’s inflation data are in, so there’s plenty of time for things to change. But given the current macro backdrop and the reality that tariffs are feeding through to price increases (at least at an early stage), we’ll have to ultimately wait and see what the next few months of inflation data will show before jumping to any conclusions.
Maximum Taxable Earnings Cap
A man calculating numbers at his desk
The other key factor that could change as a result of inflation creeping higher (potentially) in the coming months is a rise in the upper limit of the earnings subject to social security taxation. This cap, like many caps tied to government programs, tends to increase over time alongside inflation. In particular, the maximum earnings subject to social security taxation is indexed to the national average wage index (NAWI), which is slightly different than CPI (but roughly trends in the same direction).
As many baby boomers will note with their annual cost of living increases (COLA) for their monthly social security checks, these inflation-linked increases are pretty predictable. Of course, raising the cap on the maximum earnings that are taxable for social security provides more support for those currently pulling out funds, while increasing the potential payments down the line for those currently paying into this fund via their paychecks.
Bottom Line
In my view, the upcoming changes we should all expect to see for the guidelines around 2026 social security payments (and other thresholds) should be relatively straightforward and expected. Inflation has remained above the Federal Reserve’s 2% target for some time, but the CPI metric is moving much closer to this goal than where it’s previously been, so seniors (and those paying into social security) should have a much more consistent view of where their outlays or payments are expected to come in at over the years to come.
That said, anything can happen, and it’s always a good idea for baby boomers (and younger folks alike) to plan accordingly for non-optimal outcomes. The social security trust fund is a few years away from being completely depleted, so we’ll likely see some immediate reduction in the benefits seniors receive in a few years’ time. Stashing away a little extra now can go a long way for those who are nearing retirement or have a ways to go.
Compounding is our friend, and relying solely on government assistance in retirement is clearly not the optimal solution for most. That’s why we think checking out our other articles on this site makes all the sense in the world to the majority of our readers.
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