What is the cost of living adjustment (COLA)

Cost of living adjustment (COLA) is a change in the monthly benefit amount to counter the effects of inflation every year. This Social Security policy was implemented in the US in 1975 to cushion retirees’ income from rising inflation.

COLA is exclusive to the US, although other countries have implemented various strategies to curb the effect of inflation using subsidies and other federal policies. For instance, France has capped the price of energy, and Germany offers its citizens a one-off payment to help with the cost of living.

What is the purpose of a cost of living adjustment?

The Cost of Living Adjustment was enacted in response to high inflation in the 1970s. COLA ensures that inflation does not reduce the purchasing power of Social Security and Supplemental Social Income (SSI) beneficiaries.

Although it’s normal for most economies to experience some level of inflation, high inflation reduces the value of pensions and savings and those on fixed incomes.

As the cost of goods and services increases, employees and retirees need to receive higher social security payments to maintain their lifestyles.

How does the cost of living adjustment work in the US?

Cost of living adjustments may vary depending on the organization that pays monthly pensions. However, the Social Security COLA is a standard benchmark for determining the COLA benefits to retirees.

Social Security cost of living adjustments are based on the third quarter average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). 

The U.S. Bureau of Labor Statistics (BLS) determines the CPI-W, which is the official measure used by the Social Security Administration (SSA) to estimate COLAs.

The CPI-W measures the price change in a defined basket of goods and services. These are:

• Foods and beverages (dairy products, meat, snacks, and full-service meals)
• Housing (rent or similar costs for owners, heating and cooling, furniture)
• Clothing and apparel (dresses, pants, sweaters)
• Healthcare (prescription drugs, medical supplies, hospital and doctor services)
• Transportation (new car costs, airfare, gas, car insurance)
• Recreation (TVs, toys, pet products)
• Education and communication (computer services, phone services, school tuition)
• Other goods and services, such as personal services

Benefits increase to correspond with an increase in the CPI-W if there is one. If there is no increase in CPI-W or if the increase rounds to zero, there is no COLA for the following year.

Social Security COLAs can be used to measure the rate of inflation since they are based on the CPI-W. 

However, the use of CPI-W to calculate Social Security benefits has come under scrutiny for several reasons. 

Seniors spend more of their income on housing and healthcare than younger workers, who may allocate more for recreation, clothing, or education. The CPI-W has been flagged for putting more weight on categories that seniors don’t spend heavily.

How much is the US COLA adjustment for 2026?

The Social Security Administration has confirmed a 2.8% Cost-of-Living Adjustment (COLA) for Social Security and Supplemental Security Income (SSI) benefits in 2026. The adjustment, driven by increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), is designed to help benefits keep pace with inflation.

For the average retired worker, the COLA translates to an estimated increase of roughly $56 per month beginning in January 2026. The taxable maximum—the annual earnings subject to Social Security tax—will also rise, increasing from $176,100 to $184,500.

Beneficiaries will receive updated benefit information by mail starting in early December 2025. Those with a my Social Security online account will be able to access their updated notice earlier through their secure portal.

Does everyone in the US get the COLA increase?

Social Security recipients, such as those entitled to old age retirement benefits, disability benefits, and survivors, receive the COLA. Recipients of Supplemental Security Income are eligible for COLA in a given year. 

Since December 2021, the COLA program has included veteran benefits. There are other COLAs besides the Social Security COLA. Employers may offer these on a temporary basis. 

For instance, the US military occasionally gives a temporary COLA to its employees in cities with higher living costs. The COLA expires once the work assignment is complete.

How to calculate a cost of living increase

Understanding how to calculate a cost of living increase helps you estimate how much your benefits or wages will rise to keep pace with inflation. The formula is straightforward:

1. Multiply your current monthly payment by the COLA rate

For 2026, the COLA rate is 2.8%.

Formula: Monthly payment × 2.8% = COLA increase amount

2. Add the increase to your current payment

Once you calculate the increase, add that number to the amount you received in the previous year.

Formula: Previous monthly payment + COLA increase = New monthly benefit

Example:

If you receive $2,000 per month:

$2,000 × 0.028 = $56 increase

$2,000 + $56 = $2,056 total monthly benefit for 2026