Retirement Social Security

2 Big Social Security Flaws That Will Keep Hurting Retirees in 2026

How COLA math and tax rules squeeze seniors.

By Katy Willis

Edited by Amanda Machado

Updated Dec. 30, 2025

For millions of retirees, Social Security is the backbone of their monthly budget. It pays for groceries, utilities, prescriptions, and the basics that keep life stable. So when the rules behind those checks are flawed, they can create income gaps that can cause you real stress.

Some of the biggest issues are built into how benefits are calculated and taxed. Those same flaws that chipped away at buying power in past years will still be there in 2026, even with the new cost-of-living adjustment (COLA).

Two of the biggest issues that keep hurting retirees are the way the COLAs are calculated and how Social Security benefits are taxed. Both can quickly shrink your actual deposit, reduce your purchasing power, and have a real impact on your retirement plan.

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COLA isn't based on retiree inflation

Every year, Social Security announces a COLA so benefits "keep up" with inflation. For 2026, the COLA is 2.8% and is applied to whatever your base benefit was in 2025.

But the way that number is calculated has a built-in problem. It uses an inflation measure called Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), not an index built around retirees. CPI-W tracks price changes for households where people are still working. This is a group that's very different from most retired households.

Retirees spend their money differently. A bigger slice of the budget often goes to Medicare premiums, other health costs, prescription drugs, and housing. Those costs have tended to rise faster than general inflation in many years. A study from the Senior Citizens League shows that because COLAs are tied to CPI-W, Social Security benefits have lost roughly 20% of their buying power since 2010.

For example, your money goes up by 2.8% in 2026, but your Medicare premium, drug copays, and property taxes rise 5% or more. That's a much higher rise than your 2.8% COLA. And, of course, that gap widens and compounds over time. A retiree who starts out comfortable can find that the same Social Security check covers less and less of the basics, even without any big lifestyle changes.

It's true that you can't change COLA, but you can plan as if your real inflation will be higher than the official increase. You can build a budget that assumes your medical and household bills will rise faster than your benefits and, if possible, keep a small emergency fund specifically for rising costs.

If you're still working, think about delaying your Social Security claim so your base benefit is higher when you do start. The COLAs will still be the same, but they'll be applied to a bigger base, so you'll get a bigger dollar increase, and this compounds over time.

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Social Security tax thresholds are frozen, so more retirees pay tax

Another of the biggest Social Security flaws is the provisional income thresholds. These determine how much of your Social Security benefits are taxable. The problem is that these thresholds were set back in the 1980s, and they haven't changed since. They haven't even been inflation-adjusted.

Provisional income includes:

Your adjusted gross income
Any tax-exempt interest
Half of your Social Security benefits

Because these thresholds haven't changed, every year, more and more retirees find themselves having to pay tax on either up to 50% or up to 85% of their benefit, even if they're not earning much more beyond the basic COLA increase.

The limits are:

Single filers earning below $25,000 pay no tax on their benefits
Joint filers earning below $32,000 pay no tax on their benefits
Single filers earning between $25,000 and $34,000 pay tax on up to 50% of their benefits
Joint filers earning between $32,000 and $44,000 pay tax on up to 50% of their benefits
Single filers earning above $34,000 pay tax on up to 85% of their benefits
Joint filers earning above $44,000 pay tax on up to 85% of their benefits

If you're close to any of these limits, the 2026 COLA (or any future COLAs) could push you into the higher tax bracket. Even though, for the average retiree, the 2026 COLA is only a gross raise of $56 per month.

Similarly, a modest increase in your IRA withdrawals, part-time work, or required minimum distributions in your 70s can push more of your benefits into the taxed category. This can put a big dent in your monthly budget.

To mitigate against this, you'll need to pre-plan your income as much as possible. Pay attention to how much you withdraw from traditional IRAs and 401(k)s in a single year. Spread large withdrawals, such as money for a roof replacement or a car purchase, over two tax years if possible. Consider using Roth accounts or other savings that don't raise your provisional income in the same way. And watch how part-time work or side gigs stack on top of your benefits.

Bottom line

Social Security isn't going away, and 2026's COLA is modest but meaningful. But the way benefits are adjusted and taxed has built-in flaws that can chip away at your buying power over time. You can't control these rules, but you can plan around them to maximize your senior benefits.

Learn the rules and check how they apply to your situation. You may also want to speak to a retirement planning professional. Figure out when it's best for you to claim, how much you can withdraw from savings, and whether you want to keep some flexible income sources. If you're already retired, you may need to adjust your spending or retirement plan and consider spreading income across more years.

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