Social Security COLA 2026: Why your raise could be smaller than expected
The purpose of Social Security COLAs is to help beneficiaries maintain their buying power from one year to the next. Social Security COLAs are tied directly to changes in inflation. When inflation rises from one year to another, benefits go up. When there's no increase in inflation, or when there's a decrease, Social Security benefits stay don't get a COLA (but thankfully, they also don't go down).
At this point, many Social Security recipients are eager to know what 2026's COLA will amount to. In 2025, benefits got a 2.5% COLA. Many older Americans are hoping that 2026's COLA will be larger, or at the very least, the same.
But there may be a challenge in calculating next year's COLA that results in a lower raise for Social Security recipients. And it's something seniors need to prepare for.
How Social Security COLAs are calculated
Many people know that Social Security COLAs are based on inflation, but it's a bit more nuanced than that. COLAs are based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the Consumer Price Index for All Urban Consumers (CPI-U).
In a nutshell, the CPI-U tracks changes in the cost of common goods and services. The CPI-W is similar but differs in the specific population it tracks (urban wage earners and clerical workers).
Senior advocates have tried to get lawmakers to change the way Social Security COLAs are calculated — essentially, because the CPI-W is not a very accurate measure of the costs beneficiaries tend to face. The typical Social Security recipient is not a clerical worker or urban wage earner, so the fact that this specific index is used for COLA purposes makes little sense to some. However, lawmakers have not exactly been rushing to make a change.
Why Social Security recipients could get shorted in 2026
The Senior Citizens League, an advocacy group, recently announced that based on inflation readings to date, 2026's Social Security COLA could come in at 2.5%. That's the exact same COLA beneficiaries received at the start of 2025.
However, the Senior Citizens League also flagged a big issue. Citing The Wall Street Journal, it said that a hiring freeze at the Bureau of Labor Statistics has limited the amount of price data the agency can collect. If the CPI-W doesn't have a complete set of data, it could result in an even smaller Social Security COLA than seniors should be entitled to in 2026.
Of course, it's possible that incomplete data could work in seniors' favor. But there's no way to know. And also, if the CPI-W is going to continue to be the measure for calculating COLAs, it should at least have accurate data. If that doesn't happen this year, seniors could be out of luck.
The Social Security Administration will be not be able to announce a 2026 COLA until October. But seniors who rely on those annual raises may have to brace for a disappointing number. Those who can't afford a stingy raise should make changes now, whether it's reducing spending, getting a part-time job, or both.
The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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Why fears of a retirement crisis may be overblown
The steady stream of dire news about Social Security continues to affect retirement plans around the country; but one man is surprisingly optimistic about its future. On this episode of Decoding Retirement, host Robert "Bob" Powell speaks with Andrew Biggs of the American Enterprise Institute. Biggs reveals that retirees tend to be much more confident in their savings, and discusses why the doom and gloom about Social Security may be premature. For a refreshingly contrarian take on retirement in America, listen to this week's installment of Decoding Finance's Decoding Retirement is hosted by Robert Powell. Find more episodes of Decoding Retirement at People say, oh, we're facing a retirement crisis because of this or because of this or because of this. Throughout, there's data we can check on this, and we can see how many people are offered retirement plans, how many people are contributing, how much they're contributing, how much retirement savings are, how much retirement incomes are. When you look at those things and you start pulling on the strings of this retirement crisis narrative, it, it falls apart very, very quickly. Welcome to Decoding Retirement. We are your first and last stop in your retirement planning journey, your journey where you're planning for or living in retirement. Now today, many are told that there's a retirement crisis in America that we haven't saved enough to fund our desired lifestyle that too few people have access to an employer sponsored retirement that Social Security is going bankrupt. Well, we have found someone with a contrarian point of view and that someone is Andrew Biggs. He's the author of The Real Retirement rises, and he's also a senior fellow at the American Enterprise Institute. Welcome, Andrew, pleasure to have you. Thanks, Pops. Great to be with you. Thank you very much. I appreciate it. Yeah, we appreciate you coming on board and I we're gonna start off, I think, with a that I think I know the answer to, but many of our recent guests are now sounding the alarm about the Social Security trust fund and that Americans might either have to plan for an across the board 23% cut in their benefits or maybe young workers and the yet to be born as well as wealthy Americans might have to plan for a reduction in benefits or higher taxes, and I'm curious for your thoughts on, on that and what people should do because of it. Sure, uh, well, I mean the, the theme of my book, the, the real retirement crisis is that, you know, in general we don't face retirement crisis.I will say that, you know, if Social Security goes insolvent, which is projected to in around 2033, and if you cut benefits across the board by 20%, you know, that in fact, would, would be a retirement crisis because there's a lot of low income seniors who depend heavily on Social Security. In reality, that's very, very unlikely to happen. I mean, mathematically we do either have to pay more into the system orless out of it. Obviously, the sooner Congress does something about it, the better off we are. But, you know, Congress has known about this long-term funding gap literally for over 40 years, and every year, including this year, you know, they, they choose to kick the can down the road, and that just makes the problems more difficult to solve. So, you know, the real retirement crisis in, as I say in the book is not call household retirement savings, people saving uh through 401ks or IRAs or pensions. The real retirement crisis is almost entirely on the governmental side. It's Social Security, it's state and local government pensions. That's true in the US, it's true around the world, right? So what advice would you give to folks who are planning for a potential either increase in taxes or reduction in benefits? Is there things that a certain segment of Americans should, should do? If you're, if you're a lower income American, to be honest, I would say really don't worry about it, especially if you're someone who's age 50 today, who's approaching retirement. I really just wouldn't worry about it, because there's nobody out there who's proposing you get a 20% cut in your benefits. In fact, most of the social security reform proposals from Democrats or Republicans would either keep benefits in place for low earners or to actually increase them. If you're somebody in the middle or at the top of the income distribution, what you might want to do to prepare for Social Security's financing problems is save a little bit more on your 401k today. Save an extra percentage point or two towards retirement every year. Now, if we decide to fix Social Security by raising taxes, you can sort of dial back your contributions cause you know those higher taxes will enable system benefits. But if on the other hand, you know, solvency is addressed by reducing benefits, you'll be prepared. So that's something I think that people can reasonably do today to sort of protect them against whatever might happen in the future. Yeah. So Andrew, I want to turn back to your book, and one of the things that you mentioned in the book is this notion of the life cycle model and how that could or should influence people as they think about whether there's a crisis or not. Talk more about that. Well, the life cycle model, sort of the the workhorse model for how economists think about people's decisions on borrowing, saving, spending, and, and what the life cycle model says is you're gonna sort of allocate the resources you have over your lifetime to the parts of your do you the most good. So somebody who's very young and their income is very low, they're not going to be saving for retirement. Often they're going to be borrowing, because that helps to raise their standard of living a bit. Once you get to your mid-thirties or so and and the the the height of your career, then you're no longer borrowing, then you start to save quite a that reduces your standard of living, it keeps it even with what you had when you were younger, but it helps you amass resources, so when you retire, you can live off of those savings. So it's not incredibly different from what financial planners think about in terms of, say, retirement income replacement rates, where you want to be able to maintain the standard of living you had before what it does, I discussed this in a couple chapters in the book, is it does give some predictions about what might happen when children enter the household, and how does that affect people's need to save for retirement. It gives you some idea of what the spending path in retirement will be. Often financial planners assume you're going to save the same amount or you're gonna, you're gonna spend the same amount every year throughout retirement from 65 to 75 to 85 and shows that's not what people do. They tend to spend more early in retirement and they spend dramatically less as they get older. It's not because they're running out of money. It's because people derive less utility, less enjoyment from taking a worldwide cruise at age 95 than they do at it gives you some different sorts of predictions. And when you account for those, those are some of the reasons why the retirement saving situation for Americans is so much more positive than a lot of people think itis. Yeah, we've had David Blanchett on where we talked about his research that he did at Morningstar, the smile research, and in that discussion, we talked about the research that Michael Hurd did over at the RAND Corporation where he shows that, right, spending declines on a on a real basis, 1 to 2% per to my way of thinking means that uh you may either be over saving or investing more aggressively than you should, given that you, your spending is going to decline in your retirement years. Well, I mean, if you rely on the work by Mike Heard and and his co-author Suzanne Rowe, they're both out of the RAND Corporation in Santa Monica. They're excellent researchers. And what they find is when you account for the the actual spending past that people have in retirement, where they're declining a little bit each year, the amount of wealth they need at retirement is about 16% lower than than if they were having steady spending throughout that has an even larger effect. If you assume, say, half of your income will come from Social Security, that means the amount of savings you need, say, in your 401k or IRA retirement isn't 16% lower, it's 32% lower. These are dramatic effects when we simply look at the data, and, you know, one of the the points I make throughout the book is people say, oh, we're facing a retirement crisis because of this or because of this or because of there's data we can check on this, and we can see how many people are offered retirement plans, how many people are contributing, how much they're contributing, how much retirement savings are, how much retirement incomes are. When you look at those things and you start pulling on the strings of this retirement crisis narrative, it, it falls apart very, very quickly. Yeah, now, I think I've listened to you speak in the past where you've described the crises as not universal, that it's, there's no crisis for those in the lowest income quintiles nor in the highest income quintiles, but perhaps maybe in the middle where people aren't quite sure of how much they need to save. They've been given rules of thumb like you may, you need 10 times your final year salary set aside at retirement to fund your desired lifestyle or you need, as you mentioned, 70 to 80% of your pre-retirement fund your lifestyle. Uh, are we misleading people with those numbers by chance, given the, given that consumption declines over the course of retirement? Oh, the, the standards for replacement rate rules of thumb. I mean, they're not terrible. Um, they, they are misleading in the sense that they assume people want steady consumption and retirement, but the reality is if you look at data on the replacement rates people actually have, the vast majority are over that 70% benchmark that's commonly cited. You haveEspecially if you're looking at lower income people, often they have higher incomes in retirement than they do previous to retirement, but even in the middle and the high end, it's really only a high end where replacement rates get down to that sort of 70 to 80% range. Even in the middle, they tend to be quite a bit higher. Again, these are things we just need to check andI came out of the the policy office of the Social Security Administration. We use very, very sophisticated models for projecting what people's future retirement incomes, future replacement rates will be. And those really what turned me around on, on this idea of the retirement crisis, and this is 20 years ago, wasThe career employees at at Social Security were reading these articles in the newspaper about the retirement crisis and so and so is predicting it, and they're like, our model is not showing that. Now what they tend to show is replacement rates for typical retirees in the future. The replacement rates your retirement income is percentage of your pre-retirement earnings would be pretty similar to what they are today, and there is no retirement crisis today. a very well off part of the population, whether you look at their incomes, their wealth, their poverty rates, or if you simply ask them, you know, how financially secure do you feel? Can you handle an unexpected expense?There is no crisis today, and if there's not one today, there's very unlikely to be one in the future. Yeah. So how do you explain, Andrew, I look at like the Employee Benefit Research Institute study, the retirement confidence survey, that each and every year seems to indicate that only 25% of people are very confident. It is what am I missing? Ohwell, it's, it is understandable that people will feel nervous about retirement.I mean if you think, say if you're 35 years old and you're starting to save for retirement, you have to think about what is the path that my future earnings, which you don't know. You have to think about what is the rate of return I can get in my savings. You have to think when might I you have to think about how long I might live, and you get one shot to get it right. So, you know, clearly it's, it's a confusing kind of thing. But there's good data from Gallup, because they go back for over 20 years, and they will ask, uh, working age Americans, how confident are you that you, that in retirement, you will have enough money to live comfortably. That's the quote. So it's not just, you know, avoid poverty, live comfortably. U depend.60% of people say then when they look at retirees themselves, they say, do you have enough money to live comfortably? It's 80% or so. So what that means you have a big and and we can go back and say, you know, the people 20 years ago who were saying it is 60% confidence in in retiring comfortably, they're retired we, and there's other data you can do the same thing. So we know that a lot of people are worrying unnecessarily about retirement. And look, it's a confusing thing, and if they read the newspaper, there is this drumbeat of pessimistic stories about retirement. I mean, I have an automated Google search on the first retirement crisis, and it probably gives me 5 media hits a it's, and so part of the purpose of writing the book was to give people, you know, some some feeling for, OK, what what do we mean when we say that? And you know, I have one chapter, I look at all these studies that claim to show your retirement crisis. Again, you pull at the strings of them and it just falls apart. And you know, the various motivations for pushing this know, if you're in the news media, if it leads, it leads. So there there's the incentive, people will click on that story, um, but it's, it, it really is a much, much more um confident and optimistic story, and it doesn't mean nobody faces any problems. I'm not being Pollyannaish about if you look at a variety of surveys, I mean, this is a nice example of survey Vanguard did several years ago where they asked retirees, do you think the nation faces a retirement crisis? And about 60% or so say yes. Then they asked them, would you consider your own financial situation or retirement crisis, and only 4% say it's everybody thinks everybody else faces a retirement crisis, but consistently, and there's other surveys like from the Federal Reserve, it's only about 5% of people in retirement who say, I'm really, really struggling. That's a solvable problem. That's, that's a really an easily solvable problem, and we need to focus on the problems we have and solve them, not scare ourselves to death with problems that really don't exist. All right, Andrew, I'm beginning to feel more optimistic than I was at the start of our conversation, so thank you for that. We have to take a short break and when we come back, I want to talk about a problem that is also in the news that I'm sure you have some thoughts about the coverage issues in the 401k market. Don't go away. Welcome back to Decoding Retirement. I'm speaking with Andrew Biggs. He's the author of a new book called The Real Retirement Crises. He's also a scholar at the American Enterprise I, before we took a break, I promised that we would talk about a problem that is often mentioned in the news, which is that the 401k plans are inadequate for a couple of reasons, one of which there are many, uh, reports that suggest that only 50% of workers are covered by an employer sponsored plan like a 401k and thus half of working Americans may not be saving for retirement. I'm sure you have some thoughts about that too, right? Maybe some optimistic notes. Well, there's, there's a difference between coverage and participation. Um, if you look in Bureau of Labor Statistics data, um, where they look, they, they contact employers and ask them about their retirement plans, it's this year somewhere around 72% of private sector employees are offered a retirement plan at the job. Uh, most of those cases will be 401k. We have some 403Bs, some remaining DB and so but it's about 3/4 of employees are offered retirement plan, and a little over half of those participate in the plan. Now it's so they're they're different issues, you know, one is, you know, do you have the opportunity to save at work and the vast majority of people today do, and of those who don't, it tends to disproportionately younger and lower income, uh, workers who again in your life cycle model have less need to save, and so they place less demand on their employers to provide these, you know, employers are trying to provide the benefits that matter to their employees. Some of these statistics that has shown much lower coverage rates are often done from we call household surveys, you know, somebody shows up at your door, calls him the phone and asks you, uh, you know, are you offered a 401k at work?When I was at Social Security, I think the word came out suddenly after I left, but they, they did a study where they looked at these surveys where people asked, are you offered a retirement plan? Do you participate in it? And then they matched those survey responses up to income tax data which showed whether they're in a plan or not. And and what they found is a lot of people answered these questions wrong. um, and so when they used income tax data for these very same participation rate rose from 50% to about 60, 62%. So we do have, I mean I have a chapter in the book called the Crisis and retirement Data, that a lot of these data we think, you know, we just assume the numbers are correct and they're not. So it's, it really is making sure you're looking at reliable data. Data coming from employers is going to be more reliable than when somebody knocks on your door or calls you on the there's definitional issues, you know, say for instance, the, the, the definition of income in the Census Bureau uses when they're calculating its poverty rate for seniors, only counts what's called a regular income. And so if you have irregular withdrawals from an IRA or 401k, that's not counted as part of your income, which is instead you look at IRS data where they do count as income, the poverty rate in old age drops from 10% to 6%. So it, it, there is, there's a real issue there of it's not just people panicking, it's, it's a lot of the data we use are not accurate. So the, you know, the coverage your question is, are most people who should be saving for retirement actually saving for retirement? The answer to that is yes. Not all of them, and, you know, I'm fine with something like what you have in the UK where everybody is offered a retirement plan, although, you know, we gotta think about the downsides of I'm OK with it. But if you look at IRS data and say, OK, um, the percentage of, say, married couples, you know, who are probably have the age and the income level that they should be saving for retirement, over 80% of them are in fact saving for retirement. So this retirement coverage gap or participation gap is simply a lot smaller than people think it is. Yeah.I, I, I know that you're fond of noting that the data is faulty in the book and, and in speeches where I've heard you speak, and, and I know that others agree with you that the Alicia Munnells and the Olivia Mitchells of the world agree that the the data is and, but, but given that the data is faulty, I mean, I look at it a couple of ways. One is the law of large numbers says the data is faulty, but I, but I still have to have the law of one number, which is me. And what do I do in spite of the the faulty data? Uh, I, I mean, just focus on myself and not whether there's coverage problem issues or whether Social Security, uh, uh, will cut my benefits or not, right? I have to focus on myself, right, in terms of my own personal retirement security. Well, sure, and, you know, it's, it says as if they say, you know, if uh if you're unemployed, there is a uh depression going on, and so your own circumstances matter, but it, it is worth looking at, you know, for instance, if we look at survey data of people who are actually retired when you actually look, are they in poverty, or do they say they're having severe financial problems, the answer to those are generally no. Um, overwhelmingly, uh, seniors will tell you they're doing pretty well financially. So, you know, if, if you have a difficult circumstance, let's say you're at the age and income range where you do really do need to be saving for retirement, but your employer doesn't offer a retirement plan, you know, that is a legitimate issue for the same time though, I mean, I, I've gone into say Federal Reserve data. I've looked at people who have reached retirement without any sort of formal retirement plan. They don't have a 401k, they don't have a pension. You would think this is the group. If there's any group that really faces problems, this would be they have total incomes equal to about 90% of their incomes just prior to retirement. The 90% replacement rate. And the reason is, I mean, some of those folks without a retirement plan tend to be very low income, so they're getting a high replacement rate from Social Security. Others tend to be people like farmers, small businessmen, where they have sources of retirement income outside of formal retirement and so some of these, you know, frightening statistics of only so many people have retirement savings, you know, some of them will exclude people of, you know, accruals under DB plans. They also exclude people who save in different ways. The Federal Reserve has a nice survey where they ask about broad sources of savings for retirement. You know, 401k, a defined benefit pension, but they also say, do you have a small business? Do you have real estate?Uh, you know, other assets and taxable retirement accounts that are going to provide you with income in retirement. And in the most recent data, somewhere around 90% of Americans approaching retirement have some form of retirement savings. So a lot of it, you just got to get the numbers right. And, you know, the amount of times I hear statistics being used, you know, nearly half of Americans approaching retirement have no retirement savings, those numbers are simply wrong. I mean, it's, it's really not even a matter they're just wrong. Some people want to have a system where everything is dictated, you know, down to the penny. Our retirement system is messy, but what it does is it actually results in a lot more retirement savings than most other countries. And having a ton of retirement savings will get you a long way. It'll overcome a lot of other mistakes. Yeah. Andrew, I'm afraid, uh, we've run out of time. I really appreciate you sharing your knowledge and wisdom with uh our viewers and our listeners. It's uh greatly appreciated, and I can't wait to have you come back on a future episode. Oh, it's my pleasure. Happy to come back anytime. Great. So that wraps up this episode of Decoding Retirement. We hope we provided you with some actionable advice to help you plan for or live in remember, if you've got questions about retirement, about money, we're here to help. Email me at YF podcast@yahoo and we'll do our best to answer your question in a future episode. And lastly, remember you can listen to Decoding Retirement on all your favorite podcast platforms. This content was not intended to be financial advice and should not be used as a substitute for professional financial services. Related Videos Netanyahu Details New War Plans to Send Troops into Gaza City and Camps Trump Urges China to Massively Step Up Soybean Purchases Nvidia & AMD investors can put China chip tariff risks 'to bed' Trump's 'pay-to-play' deals blur line between govt. & free market Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
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