Social Security COLA Forecast: Here's the Good and Bad News for Retirees

Yahoo

27-04-2025

Believe it or not, retirees are less than six months away from finding out how much their Social Security benefits will increase next year. But you don't have to wait to learn what the annual cost-of-living adjustment (COLA) is expected to be.
The Senior Citizens League (TSCL), a nonprofit organization that advocates for seniors, updates its Social Security COLA forecast each month. The organization's latest prediction is out -- and there's good news and bad news for retirees.
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Let's start with the good news: Retirees can expect a Social Security benefits increase of 2.3% in 2026 based on TSCL's latest projection. That's lower than the 2.5% adjustments received in 2025. You might be wondering, "Why is a lower COLA good news instead of bad news?" To answer that question, we have to understand how the annual COLA is calculated.
The Social Security Administration (SSA) uses an inflation metric called the Consumer Price Index for Urban Wage Earnings and Clerical Workers (CPI-W) to determine what the annual COLA will be. In particular, the agency measures the percentage increase (if any) between the average CPI-W for the third quarter of the current year and the average CPI-W for the third quarter of the previous year.
One downside to using the CPI-W is that it doesn't always accurately reflect the price increases experienced by seniors. For example, the inflation metric doesn't weight healthcare costs as highly as they impact seniors' budgets.
Another drawback to the annual Social Security COLA (regardless of which inflation metric is used) is its timing. Retirees don't receive a benefits increase until after they've paid higher prices for products and services.
Because of these issues, the ideal COLA would be 0%. This would mean that retirees wouldn't be at risk of losing any buying power with their Social Security benefits due to inflation.
Now for the bad news: The actual Social Security COLA will likely be higher than TSCL's latest forecast of 2.3%. There's a simple explanation why.
As you might expect, the CPI-W is one of the key indicators TSCL uses in its model to project the next COLA. However, the most recent CPI-W figure available was for March. This number didn't include the full impact of tariffs implemented by the Trump administration. The effects of those tariffs will likely start to be reflected in the CPI-W metric beginning in April.
TSCL Executive Director Shannon Benton said in a press release, "Along with most economists, TSCL expects the new tariffs to lead to higher inflation. Our COLA model will likely reflect that in coming months as the CPI-W and other economic indicators respond to the new import tax policies."
Benton expressed concern about the impact of tariffs on seniors. She said, "Placing broad-based tariffs on goods from numerous countries could have a profoundly negative impact on the daily lives of seniors, including the costs of drugs and medical equipment that many seniors rely on." Benton added, "It is also highly likely that import taxes will keep food prices high, increase auto insurance costs, and contribute to higher inflation, among other effects."
If tariffs do cause inflation to surge, the next Social Security COLA will also be higher than currently projected. However, as explained earlier, a higher COLA isn't good news for retirees.
To make matters worse, higher-than-expected inflation and COLAs could cause the Social Security trust funds to run out of money more quickly than projected. The Social Security Trustees currently predict that the trust funds will be depleted in 2035. However, that timeline could be overly optimistic if the inflation assumptions used in the forecast are too low. Unless significant reforms are made to Social Security, retirees could be faced with steep benefit cuts.
I don't want to end on such a negative note, though. There is some more good news, too. Retirees in the U.S. have a lot of political power. Few, if any, politicians in Washington, D.C., will want to anger so many of their constituents by allowing major Social Security benefit cuts to happen. Regardless of what next year's COLA is, the chances that Congress and the president will take action before Social Security's trust funds run out of money should be high.
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Social Security COLA Forecast: Here's the Good and Bad News for Retirees was originally published by The Motley Fool