Retirees Are Set for a 3.6% Social Security Increase After a 2.8% Boost This Year: What It Means in Dollars

Key Points

• Social Security COLAs are tied to an inflation gauge that is not ideal for older adults.

• The program also faces a funding shortfall that could reduce benefits far more than COLAs increase them.

Each year, current and future retirees have a few major questions about Social Security. Chief among them are how large the next cost-of-living adjustment, or COLA, will be and how much that raise will add to their monthly and yearly income.

The latest COLA has been announced at 3.6%, which is noticeably higher than the 2.8% increase from the prior year. That stronger adjustment is not a sign of extra generosity; it simply reflects the higher inflation seen recently. Here is a closer look at what those increases mean for benefits.

What did a 2.8% COLA do?

The size of the increase depends largely on how much a person already receives. The average monthly Social Security benefit was $2,089 as of September. One year earlier, it was $2,010. That 2.8% increase added about $56 to a $2,010 benefit, raising it to roughly $2,066.

How will the 3.6% COLA affect retirees?

The previous increase is now behind us. What matters more at this point is how the newer COLA changes monthly payments. The table below shows the impact using current numbers:

Data source: Calculations by author.

The annual effect looks like this:

Data source: Calculations by author.

Why COLAs only tell part of the story

Any raise in retirement income is welcome, but it is a mistake to assume Social Security COLAs will fully match inflation.

For one thing, the formula uses the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which is not designed with retirees in mind. It measures the spending of workers rather than older adults. A more relevant measure for Social Security would be the Consumer Price Index for the Elderly, or CPI-E, which gives greater weight to categories such as healthcare and housing.

Personal spending habits matter as well. If a retiree spends heavily on healthcare and those costs rise sharply, even a higher annual COLA may fall short of what is needed.

It is also important to remember that Social Security faces a financing gap. Projections indicate that around 2032, payroll tax revenue alone will be enough to cover only about 78% of scheduled retiree benefits. That is a much bigger concern than whether the annual increase is 2.8% or 3.6%.

Even if lawmakers solve the funding problem, Social Security income of roughly $20,000 to $45,000 a year will likely still be below what many people need in retirement. That makes it essential to save and invest on your own as much as possible.