Unfortunately, COLA is starting to lose its effectiveness.
Think tank proposes capping Social Security benefits at $100,000
A Washington think tank has proposed capping annual Social Security benefits for married couples at $100,000 as a way to reduce a looming deficit in retirement trust funds.
Social Security benefits are a lifesaver for millions of retirees, but as prices continue to rise, benefits become less valuable. With groceries, gas, and everything else more expensive than just a few years ago, your monthly check just won’t cut it.
That’s why Social Security has an annual cost of living adjustment (COLA) to offset some of the effects of inflation. The COLA system isn’t perfect, but it’s better than nothing. The nearly 57 million people receiving retirement benefits would probably agree.
If you’re currently retired or nearing retirement, here are five things you need to know about Social Security COLAs.
1. COLA is not based on a standard inflation measure
The annual COLA is based on changes in inflation, but not the standard inflation numbers typically reported in the news. The standard inflation rate is the Consumer Price Index (CPI-U), but Social Security uses the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W).
Both track the prices of goods and services such as housing, food and clothing, but the CPI-W only looks at households where most of their income comes from office work or hourly work. The CPI-U includes approximately 93% of the population, while the CPI-W includes approximately 29%. CPI-U numbers are usually higher than CPI-W numbers.
2. Only the third quarter inflation rate matters for COLA.
Social Security does not account for inflation throughout the year. Examine only July, August, and September (Q3). To see it in action, let’s take a look at the three-step process for setting an annual COLA.
- Average CPI-W for the third quarter of this year.
- Compare that to last year’s third quarter CPI-W average.
- Set the future COLA as a percentage increase (rounded to the nearest tenth of a percentage).
For example, the third quarter average in 2025 was 2.8% higher than in 2024, which determined this year’s COLA of 2.8%. The 2024 average was 2.5% higher than 2023, resulting in a 2025 COLA of 2.5%.
3. COLA does not reduce benefits
In some cases, one year’s CPI-W number may be lower than the previous year. Fortunately, Social Security won’t reduce your benefits if this happens. You can only increase it.
This doesn’t happen often, but it happened in 2010, 2011, and 2016.
4. Medicare may reduce COLA benefit increases
Although Social Security and Medicare are two separate social programs, they are linked because many Social Security recipients’ Medicare Part B premiums are automatically deducted from their Social Security benefits.
Your Part B premiums will increase, potentially offsetting some of the boost you receive from your COLA. This is a case that started this year.
If someone’s Social Security benefits were $2,000 in 2025, they would receive an additional $56 this year after the 2.8% COLA. However, your Part B premium increased by $17.90 to $202.90, and you actually received only $38.10 in additional benefits.
5. Annual COLAs don’t quite keep up with inflation.
Even though benefits have increased every year, retirees’ Social Security checks haven’t made much progress. Since 2010, Social Security benefits have lost 20% of their purchasing power, according to the Nonpartisan Senior Citizens Coalition (TSCL), a nonpartisan senior advocacy group. That means $100 back then would only buy $80 worth of items today, which is obviously not ideal.
There is no one solution to this other than increasing benefits beyond the COLA, but this has long-term problems and will deplete Social Security funds faster. However, some suggest using another metric to determine COLA, such as the CPI for people 62 and older (CPI-E).
There is no indication that the process will change, so for now, retirees will unfortunately have to adjust accordingly.
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