How Do Cost-of-Living Adjustments (COLA) Work?

What Is Next Year’s COLA?

Everyone notices how prices for groceries, rent, gas, and other essentials seem to climb over time. When prices go up, fixed incomes — like pensions, government benefits, and some retirement plans — lose real value unless they are adjusted. That’s where cost-of-living adjustments, or COLAs, come in. COLAs are designed to help incomes keep pace with inflation so that people on fixed incomes aren’t quietly losing purchasing power year after year.

In this article, we explain what a COLA is, how it works, the key differences in COLA applications today, and what the next scheduled COLA for Social Security and similar programs is expected to be. We’ll focus especially on the well-known U.S. Social Security COLA — since that’s one of the biggest and most widely watched examples — but the same principles also help explain how COLAs function in other public and private benefit systems.

1. What Is a Cost-of-Living Adjustment (COLA)?

A cost-of-living adjustment (COLA) is a periodic increase in income — usually expressed as a percentage — intended to offset the impacts of inflation. In plain terms, it’s an automatic raise applied to benefits or other payments so that recipients do not lose purchasing power when overall prices rise.

Inflation is tracked by measures such as the Consumer Price Index (CPI) — a statistical measure of average price changes in a basket of goods and services over time. When that index rises, it means that overall costs have increased. COLAs use changes in the CPI (or a variant of it) to set annual adjustments.

COLAs show up in many contexts:

Government programs like Social Security and Supplemental Security Income (SSI)
Public pensions for teachers, firefighters, civil servants, and military retirees
Private employment contracts or pensions that include inflation protection
Union contracts where wages are tied to price changes

The basic idea is simple: if prices go up by a certain percentage over a year, benefits go up by that same percentage to help maintain spending power.

2. Why Do COLAs Matter?

Imagine someone receives a fixed monthly benefit of $2,000. If inflation is 3% over a year, the cost of everyday goods will, on average, be 3% higher. Without a corresponding increase in income, that person effectively loses 3% of what their income can buy. In real-world terms, groceries, rent, utilities, and other essentials would cost more while income stays the same — squeezing the budget. A COLA is meant to prevent exactly that.

COLAs don’t automatically increase real wealth — they help preserve existing purchasing power amid inflation. That means benefits won’t go as far if inflation is high, but at least they don’t shrink in value just because prices rise.

This is especially important for people whose primary income comes from fixed sources: retirees, people with long-term disabilities, and others living on pensions or government assistance. Without COLA, inflation would steadily erode the real value of their income.

3. How COLAs Are Calculated

For big programs like U.S. Social Security, the COLA is based on changes in a specific inflation measure, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That is a particular version of CPI calculated by the U.S. Bureau of Labor Statistics focusing on the spending habits of urban workers and clerical employees.

Here’s how it works in the Social Security system:

The Social Security Administration (SSA) looks at the CPI-W average for a given period — typically the third quarter (July, August, September) of the current year compared to the same quarter in the previous year.
If the CPI-W has increased, the percentage change becomes that year’s COLA.
This percentage is then applied to benefit payments for the following year.

Because the CPI-W reflects average price changes across the economy, the COLA attempts to mirror real price inflation. But it’s worth noting that many retirees argue that the CPI-W doesn’t always reflect the prices seniors face — for example, healthcare and housing costs may rise faster than the CPI-W indicates.

4. How COLAs Are Used Across Programs

• Social Security and SSI Benefits

In the United States, Social Security retirement, disability, survivors benefits, and Supplemental Security Income all receive annual COLAs based on CPI-W changes. These adjustments are automatic once they are announced — beneficiaries don’t need to apply or file paperwork to receive them.

COLAs also affect other related benefit categories:

Survivor benefits for family members
Disability payments under Social Security Disability Insurance (SSDI)
SSI payments for low-income older adults and people with disabilities

Because these programs serve a broad population — including retirees, people with medical challenges, and families — the COLA is a critical mechanism for preventing benefit erosion when prices rise.

• Military and Federal Pensions

Military retirees and many federal civilian retirees also receive COLA increases tied to similar inflation measures. For example, military retirement pay is adjusted based on the same Social Security COLA metric; this ensures that long-term military retirees do not lose income value over time due to inflation.

• Private Employers and Unions

Some private pensions and employment contracts include COLA provisions. These are negotiated terms that promise periodic wage increases linked to inflation measures like CPI-U or CPI-W. The specifics vary widely by industry and employer.

5. What Is Next Year’s COLA? (2026 Social Security COLA)

For 2026, the Social Security Administration announced a 2.8% cost-of-living adjustment for Social Security and SSI benefits.

Here’s what that means in practice:

2.8% Increase: Social Security retirement and disability benefits will rise by 2.8% beginning with payments for January 2026 (paid in late December 2025 or early January 2026).
Average Payment Boost: For typical beneficiaries, that works out to roughly $56 more per month compared to 2025 benefit levels.
SSI Benefits: Supplemental Security Income (SSI) maximum federal payment limits will also be raised automatically with the same 2.8% increase.
Other Programs Affected: Other benefit limits — such as wage limits for retirees who work and the maximum taxable earnings for Social Security contributions — are also adjusted.

This 2.8% COLA for 2026 is slightly higher than the 2025 adjustment (which was about 2.5%) but below the unusually high increases seen in years when inflation spiked.

6. What Drives the Size of a COLA?

At its core, the size of the COLA depends on inflation.

When inflation is high, the CPI-W typically rises more, which can lead to a larger COLA.
When inflation slows, the increase in CPI-W — and thus the COLA — may be smaller.

Inflation itself is influenced by things like energy prices, supply chain issues, wage growth, and broader economic conditions.

For example, periods of rapid inflation in recent years led to larger COLAs (as high as 8.7% in 2023). When inflation slows again, COLA percentages reflect that moderation.

7. How COLAs Affect Beneficiaries

• For Beneficiaries

A COLA means a higher monthly benefit — but not necessarily more purchasing power if inflation outpaces the COLA rate. That’s a key nuance: COLAs aim to match inflation, but they may not fully cover every individual’s cost increases (healthcare costs, housing, and regional price differences can vary).

• For the Broader Economy

When large segments of the population receive COLA increases, this can:

Put more spending power into the economy
Increase government spending on benefits
Influence tax and budget decisions

Policymakers watch COLA movements closely because they affect both the welfare of citizens and long-range fiscal planning.

8. Common Misconceptions About COLA

COLA means extra income:
Not quite. A COLA does increase nominal income — the dollar amount you receive — but it doesn’t guarantee more purchasing power. Its purpose is to stabilize purchasing power against inflation, not to boost real income.

Everyone gets the same COLA:
In federal systems like Social Security, everyone subject to the same COLA percentage sees the same proportional increase. But total dollars differ because benefits vary by individual circumstances (work history, benefit type, etc.).

COLAs always keep up with real expenses:
Because inflation affects different categories differently — healthcare versus entertainment, for instance — the CPI-W used for COLA can understate or overstate the price pressures individuals face.

9. Looking Ahead: What Comes After Next Year?

While the 2.8% COLA for 2026 is set, future adjustments depend on how prices change between now and next year’s CPI measurement period. Forecasts for 2027 COLA vary according to inflation trends and economic conditions, and may be revised as more data comes in.

Beneficiaries and planners alike should watch inflation data, CPI trends, and official announcements from agencies like the Social Security Administration to anticipate future cost-of-living adjustments.

10. Final Thoughts

Cost-of-living adjustments play a vital role in economic security for millions of people who rely on fixed incomes. By tying benefit increases to observed inflation, COLAs help prevent the erosion of purchasing power that would otherwise occur as prices rise.

For 2026, the scheduled Social Security COLA of 2.8% reflects a moderate inflation environment and will increase benefits automatically for eligible recipients. While that doesn’t eliminate all the financial pressures faced by retirees and other fixed-income groups, it does provide a consistent, predictable mechanism to help incomes adjust to ongoing price changes.

Understanding how COLAs are calculated and applied can help individuals plan more effectively for retirement and other long-term financial needs — not just in the upcoming year, but across the decades ahead.