Tens of millions of Americans rely on Social Security benefits for a substantial portion of their retirement income. Not only is Social Security a valuable source of retirement income, with the average retired worker receiving about $1,975 per month, but it is also the only inflation-protected source of income many retirees have.
Each year, the Social Security Administration (SSA) takes a look at Consumer Price Index data, and if there has been inflation, Social Security benefits are adjusted accordingly.
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1. How is the COLA calculated?
It's common knowledge that the Social Security COLA is based on inflation, but the specifics of how it is calculated aren't widely known.
It might surprise you to learn that the Social Security COLA is based on third-quarter inflation data only. In other words, the SSA compared the Consumer Price Index data from July, August, and September of the current year with the same months from the previous year. (Note: This is why the COLA is always announced in October, immediately after September CPI data is announced).
This isn't always the same thing as the overall inflation rate in a given year. In 2024, the average inflation rate was 2.9%, significantly greater than the 2.5% average in the third quarter.
2. What type of inflation is used?
The Social Security COLA uses Consumer Price Index, or CPI, data. But there are several versions of the CPI, and the one used for Social Security purposes is the CPI-W, which stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers.
As the name suggests, this is an index designed to measure inflation as it impacts people who are still working, not retirees. There is another measure known as the CPI-E, which places more emphasis on expenses that disproportionately affect older Americans, such as healthcare, but under current law it is not used to calculate Social Security COLAs.
3. The COLA takes effect in December, not January
Social Security recipients just got a 2.5% adjustment, and it is generally referred to as the "2025 COLA." But this is actually a misconception.
Each year's Social Security COLA goes into effect in December. This year's 2.5% adjustment was first reflected in December 2024's payments. So, it was technically the 2024 COLA. However, since Social Security is paid one month in arrears, the December payment wasn't actually received until January.
4. There's no such thing as a negative COLA
Let's say that in one year, the CPI-W declines, meaning that there was negative inflation, or deflation. Would Social Security benefits go down?
This isn't completely unprecedented. In fact, since 1914, there have been 13 years of negative CPI growth, with 2009 the most recent example. But fortunately, the lowest a Social Security COLA can be is zero.
5. What is the average COLA?
The modern method of calculating the COLA started in 1975, and since that time, the annual adjustment has been as high as 14.3% (in 1980) or as low as 0% (three times). The historical COLA average since 1975 has been an adjustment of about 3.75%, although in recent history it has been lower. Over the past decade, the average COLA has been 2.6%.
6. What will the 2026 COLA be?
It's far too early to predict next year's Social Security COLA with accuracy – after all, it's based on inflation during a period that won't start for another five months.
The Senior Citizens League recently gave its initial COLA projection of just 2.1%, which would be the lowest adjustment in five years. However, many experts think inflation ill be significantly higher. The Federal Reserve expects about 2.5% inflation this year, and a recent survey of economists found a median projection of 2.7%. So, it's possible that the 2026 COLA will be significantly higher.
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