Living expenses surged in the aftermath of the pandemic as consumers spent their stimulus checks, causing prices to rise. The Federal Reserve intervened by increasing interest rates to combat inflation. Despite these efforts, inflation remains high to this day.
Fortunately, inflation has started to ease, allowing the Fed to begin lowering interest rates towards the end of 2024. While interest rates have been temporarily paused due to a slight uptick in inflation, the hope is that inflation will continue to stabilize as 2025 progresses.
This is positive news for retirees and consumers alike, and it will also impact the cost-of-living adjustment (COLA) for retirees in 2026.
How Social Security COLAs are Calculated:
Social Security COLAs are designed to prevent beneficiaries from losing purchasing power due to inflation. These adjustments are directly linked to inflation, using data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in the third quarter.
Based on initial CPI-W data, the nonpartisan Senior Citizen’s League estimates that the COLA for Social Security in 2026 will be 2.3%, slightly lower than the 2.5% increase in 2025. Despite this, there is a silver lining in this news.
Why a 2.3% Social Security COLA is Positive:
While some retirees may be disappointed by a lower COLA, a smaller increase indicates that living costs are not rising as rapidly. This could potentially benefit retirees more than a slightly larger raise in their monthly Social Security payments.
When inflation is high, retirees on Social Security struggle to keep up, even though it leads to higher COLAs. Ideally, retirees would prefer a moderate inflation rate around 2%, which the Fed deems most conducive to long-term economic stability.
It is premature to focus solely on the percentage increase for 2026, as it is subject to change based on future inflation trends. A larger COLA is tied to higher price increases, while a smaller COLA indicates slower inflation, which is ultimately better for retirees.
In conclusion, a 2.3% increase in the Social Security COLA for 2026 may not be as negative as it initially seems. It is important for recipients to understand the relationship between COLAs and inflation for a clearer perspective on their benefits.
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