4 Things Most People Get Wrong About Social Security COLAs

Social Security is one of the most important benefits for seniors available today. And a lot of retirees end up collecting those benefits for many years. That's why Social Security's cost-of-living adjustments, or COLAs, are so important to seniors' income.

The purpose of COLAs is to help Social Security benefits keep pace with inflation. Before 1975, Social Security benefit increases had to be voted in by lawmakers on a case-by-case basis. Since then, benefits have been eligible for an automatic inflation adjustment each year.

Whether you rely on Social Security COLAs today or expect to in the future, it's important to understand how they work. Here are four things you may not have known about COLAs, but should.

They're not based on senior-specific expenses

You might assume that Social Security COLAs are calculated based on senior-specific cost increases. But Social Security COLAs are actually based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

As the name implies, the CPI-W does not focus on the costs seniors incur. Rather, it focuses on the costs wage-earners incur. That's caused Social Security benefits to lose buying power through the years.

The Senior Citizens League estimates that Social Security benefits have lost 13.7% of their buying power since 2016. And insufficient COLAs are largely to blame for that. Advocates have pushed to change the COLA formula to an index that measures costs retirees face, like the Consumer Price Index for the Elderly, or CPI-E, for this reason.

They're based on third quarter inflation data only

If you're someone who follows the news on Social Security, you'll commonly see COLA estimates pop up every month following a CPI-W release. But while those estimates may offer clues on what to expect in the new year, they're speculative for the most part.

Social Security COLAs are specifically based on CPI-W data from the third quarter of the year. So it's only data from July, August, and September that go into that calculation. The Social Security Administration typically announces an official COLA in October, once September's data becomes available. Any number you see before then should be regarded as a projection only.

There's no such thing as a negative COLA

Social Security COLAs are tied to the CPI-W directly, but that doesn't mean benefits are guaranteed to increase each year. When inflation stays flat or decreases, there can be a 0% COLA. In fact, since COLAs became automatic, there have been three separate years when no raise was given to Social Security recipients.

The good news, though, is that there's no such thing as a negative Social Security COLA. Benefits cannot go down from year to year even if there's a decrease in inflation. In that situation, benefits just stay where they are.

They can be wiped out by Medicare Part B increases

Older Americans who are signed up for Social Security and Medicare at the same time pay their Part B premiums out of their monthly benefits. What this means is that if there's a small COLA the same year there's a large Part B increase, that Part B hike could wipe out the COLA completely.

For example, say there's a year with just a 1% COLA. On a $2,084 monthly benefit, which is the average today for retirees, that's an increase of $20.84. But if the cost of Part B increases by $21, it leaves seniors with a $2,084 benefit with no COLA. And while a $21 Part B increase is high, in 2026, the cost rose by $17.90 — so $21 isn't out of the question.

Thankfully, the most a Medicare Part B increase can do is cancel out a COLA. Seniors are protected from seeing their Social Security benefits decrease from one year to the next due to a Part B increase.

Bottom line

While COLAs are an important part of Social Security, it's important to understand that they're only meant to match inflation, not get ahead of it. And based on the Senior Citizens League's findings, they often fall short in that regard.

If you're struggling to cover your retirement expenses on Social Security, you may want to look at other ways to boost a fixed income. Going back to work part-time could help put more money in your pocket and make it easier to pay your bills.

It's also worth making sure your retirement savings are set up to generate income. If your nest egg is sitting in cash, it may be time to start investing in assets that can pay you on a regular basis, like bonds and dividend stocks. Doing that could take some of the pressure off of your Social Security checks and help make up for years when COLAs aren't so generous.

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