Social Security benefits are a crucial income source for many seniors, so it’s common for retirees to eagerly await the news of their Cost of Living Adjustment each October. Cost-of-Living Adjustments (COLAs) happen automatically in most years when prices are rising because if COLAs didn’t happen, the buying power of benefits would be in constant decline due to inflation.
For 2026, retirees got some good news. The COLA taking effect next year will increase their checks by 2.8%, which is more than the 2.5% COLA in 2025. However, seniors shouldn’t get too excited about this bigger benefits bump.
There are two troubling facts that retirees need to know about this raise that demonstrate why it’s not really going to help their finances as much as they might think.
1. Medicare premium increases will take a big bite out of the COLA bump
The first thing that retirees need to know is that a good portion of their Social Security raise is going to disappear before it even gets to them. That’s because most seniors who receive insurance coverage through Medicare have Medicare premiums withdrawn automatically from their Social Security payments — and Medicare premiums are going to increase substantially in 2026.
Medicare Part B premiums are going up by around 9.7% next year. They are scheduled to increase by $17.90, hitting $202.90 per month.
This $17.90 increase will reduce the amount of the COLA that seniors actually collect. A retiree getting the average benefit of $2,008 per month will get a $56.22 raise due to the 2.8% COLA, but $17.90 of that will simply be gone as it is diverted to cover these extra Medicare costs. The premium increase is consuming almost 1/3 of the total amount that checks are rising.
Since seniors are coping with higher costs across many key spending categories, including groceries and housing, losing so much of the raise to just one expense is a huge letdown.
2. COLAs often fall short of helping seniors maintain buying power
There’s another troubling truth that retirees should also come to terms with. While COLAs are often called “raises,” they really aren’t. They’re simply meant to help them avoid losing buying power — and they are doing a bad job of it.
The Senior Citizens League has analyzed whether benefits are actually keeping up with rising costs, and the data revealed that benefits collected by retired workers today are worth only around $0.80 on the dollar compared to what they were worth in 2010. To recover the 20% loss in buying power, the average retirement benefit would need to be $2,230.46, or $370.23 per month higher than it actually is today.
While COLAs were supposed to avoid exactly this type of issue, the Senior Citizens League explained that COLAs haven’t worked effectively because of the formula used to calculate them. Under the current formula, retirees get a raise calculated by looking at year-over-year changes measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
CPI-W includes a basket of goods and services that mirrors the spending habits of urban wage earners and clerical workers, who generally spend far less of their income on things like healthcare and housing than seniors do. Since some of the categories that are underweighted in the COLA tend to be categories where cost increases outpace overall inflation rates, retirees end up getting raises that are too small in most years.
It’s unclear if that will be the case again in 2026, but the reality is that Social Security beneficiaries have already fallen behind, and there’s every reason to expect that trend to continue.
So, retirees shouldn’t be excited about that 2.8% COLA once they understand the reality of it. Instead, retirees should make sure they carefully analyze how far their dollars are going and should consider working with an experienced financial advisor to make their benefits stretch as far as possible and preserve their nest eggs throughout their later years.
Exploring options like annuities that can provide fixed income and that offer the option for COLAs can also help retirees ensure they have the funds they need to cover the basics, even if Social Security lets them down with raises that just don’t cut it.
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