For most of the more than 51 million retired workers who currently receive a Social Security check, this income is vital to their financial well-being.

Since 2002, Gallup National Polling has conducted annual surveys to determine how dependent retirees are on the income they receive from America’s leading retirement program. These surveys showed that 80% to 90% of retirees, including 88% in April 2024, rely on Social security checkto some extent, to make ends meet.

With this payment laying a financial foundation for those who can no longer insure themselves, there are few announcements more forthcoming than the annual cost of living adjustment (COLA) reveal in the second week of October.

While the recently revealed 2025 COLA, on paper, gave the beneficiaries something to smile aboutCOLA 2026 may be about to make dubious history.

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COLA from Social Security is vital for retirees

The purpose of Social Security’s cost-of-living adjustment is to help recipients combat the effects inflation.

As a hypothetical example, if the average price for a basket of goods and services purchased by seniors increases by 2%, Social Security benefits should ideally increase by an equal rate to ensure no loss of purchasing power. Social Security’s COLA is effectively the past “increase” over most years that accounts for the price pressures beneficiaries face.

The history of the COLA program is a tale of two halves. Between 1940 and 1975, adjustments were made arbitrarily by special sessions of Congress. In the 1940s, no COLA was transmitted, while a record 77% COLA was administered in 1950.

Beginning in 1975, the Consumer Price Index for Urban Wage and Service Workers (CPI-W) became Social Security’s measure of inflation, allowing for annual COLAs. The CPI-W has over 200 different weighted expenditure categories, which allows this inflation index to be reported as a single figure at the end of each month.

When calculating the cost of living adjustment, the Social Security Administration (SSA) use only the final 12-month readings ending in July, August and September (third trimester). If the average value of the CPI-W in the third quarter is higher than in the comparable period of the previous year, the aggregate prices have increased and the beneficiaries must increase.

The Social Security COLA represents the year-over-year percentage difference in the average third-quarter CPI-W readings, rounded to the nearest tenth of a percent.

A significant increase in the prevailing rate of inflation produced four consecutive above-average COLAs. However, the rate of inflation began to decelerate rapidly. US inflation rate given by YCharts.

Social Security’s 2025 cost-of-living adjustment was above average, but it’s far from perfect

Starting this year, the beneficiaries were hoping for a moment of history. Following COLA of 5.9% in 2022, 8.7% in 2023and 3.2 percent in 2024, an increase of at least 2.6 percent would mark the first time since 1997 that benefits increased by that amount for four consecutive years. But while history was not ultimately achieved, payments i am increasing by a percentage above the average.

On Oct. 10, the SSA unveiled a 2.5 percent COLA for 2025, which compares favorably to the 2.3 percent average increase over the past 15 years.

For retired recipients, who accounted for 81 percent of benefits paid by the SSA in August, the average Social Security check is it is expected to increase by $49 per month to $1,976 in 2025.

Meanwhile, the average monthly payment for disabled workers and for surviving beneficiaries is expected to increase by about $38 per month to $1,580 and $1,551, respectively, in January.

While another above-average increase in benefits probably sounds great on paper, there is a very high probability retirees getting the short end of the stick next year. Specifically, the expenses that matter most to seniors, such as shelter and health care services, see significantly higher price increases 12 months ago than recipients of the 2.5% COLA will receive. This suggests that seniors will continue to lose purchasing power in the coming year.

To add fuel to the fire, first Medicare Part B — this is the segment of Medicare responsible for outpatient services — it is expected to grow 5.9% to $185 per month in 2025. Most Medicare enrollees have their Part B premiums automatically deducted from their monthly Social Security checks. An estimated $10.30 per month increase in monthly Part B premiums will offset some or all of next year’s COLA effect for most retirees.

Image source: Getty Images.

COLA 2026 could make history (and not in a good way)

Although there are still a good six months until Social Security’s cost-of-living reductions begin in 2026, some signs suggest that history will be made — but not the kind of history that beneficiaries will be looking forward to. .

In the half-century that CPI-W has been the program’s inflationary link, there have only been three years in which prices fell year-on-year (known as deflation). On the bright side, if deflation occurs from year to year, Social Security benefits don’t refuse. However, they also do not increase if the aggregate price of goods and services falls, which resulted in no COLA pass-through in 2010, 2011, and 2016.

while much can happen to different price brackets and the US economy over the next 11 months, there is a viable path for America’s largest retirement program to incurred its fourth 0% COLA in 2026.

Recently, the 12-month headline inflation rate (TMIR) has declined rapidly. This is a reflection of the Federal Reserve raising interest rates at the fastest pace in four decades, and has likely left rates above historical norms for too long.

Starting with the September inflation report from the Bureau of Labor Statistics, TTM price changes for energy spending and new and used vehicles declined year over year. If extremely high shelter spending were to be withdrawn — shelter is the largest component of the CPI-W — it would not be a stretch for the 2026 COLA to go to 0%.

There are also a number of historically accurate predictive indicators that suggest the US economy could be heading into a recession. The Federal Reserve Bank of New York’s Recession Probability Tool, which assesses the likelihood of a recession in the next 12 months based on the difference (yield spread) between the 10-year Treasury bond and the three-month T-bill, is in the present forecasting a 57% chance of economic recession by September 2025.

Likewise, a historic decline in US M2 money supply in 2023 portends weakness to come in discretionary spending. It’s not unusual for the aggregate price of goods and services to fall during recessions, which would result in no COLA if it occurred year-over-year during Q3.

To reiterate, a lot can happen in the next 11 months. But based on the current trajectory of price changes, along with historically accurate economic forecasting tools, Social Security looks like it could make dubious history and offer just its fourth 0% COLA in half a century.