How does the 2025 cost-of-living increase affect retirement budgets and benefits?
Executive summary
The Social Security cost‑of‑living adjustment (COLA) for 2026 is 2.8%, which will raise average retirement benefits by about $56 a month starting in January 2026 and SSI payments for nearly 7.5 million people on December 31, 2025 [1] [2] [3]. Many retirees will see much of that gain absorbed by higher Medicare Part B premiums — estimates show the net boost could be roughly $38 a month for many beneficiaries after premiums are withheld [4] [5].
1. What the 2.8% COLA actually delivers to pocketbooks
A 2.8% COLA increases Social Security checks in nominal terms: SSA says on average benefits rise about $56 per month for retired workers [1] [3]. SSI recipients get their increase a day earlier on Dec. 31, 2025 [1] [2]. The dollar impact varies by individual benefit amounts; the average Social Security retirement benefit was about $2,008 in July 2025, which yields the roughly $56 figure when multiplied by 2.8% [3].
2. Why the COLA can feel smaller than the headline number
Several automatic offsets reduce the take‑home effect of the COLA. Medicare Part B premiums are typically deducted from Social Security checks; reporting shows the standard Part B premium is rising — estimates put it at $202.90/month for 2026 — which could cut the average $56 COLA to around $38 for many recipients [4] [5]. Local cost differences and rising retiree health and housing expenses mean the same nominal boost buys less in many areas [5].
3. Who benefits and who doesn’t — and federal retirees’ split treatment
The COLA adjustment applies to Social Security beneficiaries broadly, including retirees, survivors and disabled beneficiaries [1]. Civil Service Retirement System (CSRS) annuitants receive the same percentage COLA as Social Security (2.8% in 2026), while Federal Employees Retirement System (FERS) annuitants can face different, often lower, adjustments — a point of contention among federal retirees [6] [7]. Advocacy groups argue this disparity blunts the COLA’s impact for many federal workers [6].
4. Other related automatic changes that affect retirement budgets
The COLA announcement triggers other indexed amounts: the maximum taxable earnings subject to Social Security payroll tax increases to $184,500 for 2026, and earnings limits under the retirement earnings test are also raised, altering how work affects benefits for those under full retirement age [1] [2] [8]. These changes shift tax, withholding and benefit‑interaction calculations for retirees who still work or whose income is near thresholds [8] [2].
5. Longer‑term context: COLAs, inflation and retiree costs
Though COLAs are designed to track inflation, analysts note retirees’ actual spending patterns and health‑care cost growth can outpace CPI measures used to set the adjustment. Medicare Rights Center and other research point out retirees’ spending has grown faster than CPI over long periods, meaning even steady COLAs may not restore purchasing power fully [3]. Debate exists over whether the CPI‑W formula used to calculate COLA accurately captures older Americans’ inflation experience [5].
6. Practical implications for retirement budgets
For many households relying on Social Security as a core income source, a $56 average boost is small relative to typical monthly expenses and rising health costs; after Medicare premium withholding that boost can shrink materially [3] [4]. Retirees and planners should model net benefits (post‑premium withholding), consider local cost pressures, and factor in other indexed changes like taxable maximums and earnings limits that alter tax exposure and work incentives [2] [8].
7. Policy debates and alternative viewpoints
Some experts argue the CPI‑W calculation is outdated and understates retirees’ inflation; others defend the current method as transparent and historically used [5]. Federal employee groups press for equal COLA treatment across retirement systems, calling attention to gaps between CSRS and FERS adjustments [6] [7]. Available sources do not mention specific legislative remedies passed in 2025 that would alter the COLA formula or Medicare premium‑COLA interaction; not found in current reporting.
Limitations: this analysis uses official SSA announcements and contemporary reporting to describe the 2026 COLA and immediate budgetary effects; it does not project individual outcomes beyond what sources provide and does not include sources outside the set provided [1] [3] [4].