2026’s COLA is supposed to be a safe tool to make sure that your dollar will stretch as much as it did last year. However, for millions of retirees, the COLA is nothing more than a paper shield against a dragon called inflation. You may be wondering, will this 2.8% really compensate for the increase in the cost of living for a person aged 65 or older? Unfortunately, no. The formula is outdated, and the government is unable to combat inflation that erodes the purchasing power of its citizens. Do you know why? Because it is the government itself that causes this inflation.
The Obsolete Index: CPI-W
The COLA was created with the purpose of ensuring that Social Security benefits maintain their purchasing power. However, the tool used to measure inflation is not perfect. By law, the Social Security Administration is required to calculate the COLA using the Consumer Price Index for Wage Earners and Clerical Workers in Urban Areas (CPI-W). The flaw is obvious: this index tracks inflation for a very specific demographic group, people who work and live in urban areas.
The spending patterns of a person who works in an urban center are drastically different from those of a retiree. For example, a working person has to spend more on gas and daily transportation, office attire, and fast food meals on the go. A retiree, on the other hand, has two categories that dominate their budget (and they are very different): medical services and housing. This includes rent, property taxes, and utilities. Since the CPI-W does not give sufficient weight to healthcare costs, which are notoriously volatile and high, the index systematically underestimates the real inflation experienced by older people.
The 36% Loss
By using an index that is neither accurate nor realistic, the problem is not theoretical, but translates into a cumulative crisis that costs retirees thousands of dollars. According to The Senior Citizens League (TSCL), Social Security beneficiaries have lost approximately 36% of their purchasing power since 2000. In just a quarter of a century, public pensions have lost more than a third of their purchasing power.
To put it simply, what cost $100 in 2000 now costs $160… But your Social Security benefits have never been enough to cover that difference. This has serious consequences in real life. Retirees are forced to make impossible choices, such as choosing between paying higher rent, buying essential medicines, or putting food on the table.
The “Experimental” Solution: CPI-E
The only good thing about all this is that there is a tool that would solve this problem for you: the Bureau of Labor Statistics (BLS) has developed the Consumer Price Index for the Elderly (CPI-E). This index, which already tracks the spending patterns of people aged 62 and older, gives more weight to healthcare and housing. Historically, this index shows inflation figures that are slightly higher than those of the CDI-W in most years. If the government had used the CPI-E consistently, today’s retirees would receive thousands of dollars more in annual benefits. So why isn’t it being implemented?
The biggest answer is that it would mean Social Security would have to pay out billions more dollars over time. The Social Security trust fund is already broken, with an exhaustion date of approximately 2030.
If another index were used, the insolvency crisis would be brought forward by three to five years. For now, we know that the accounts don’t add up, but for now they are postponing the problem. In the meantime, retirees will have to tighten their belts and be more careful with the small budget they have with their monthly pension.