Why a 3.6% Social Security COLA May Not Be Good News

For many older adults, Social Security is the most important source of income they have. That is why the program’s yearly cost-of-living adjustments, or COLAs, matter so much.

In the past, Congress had to approve benefit increases to account for inflation. Now, Social Security payments automatically receive an annual inflation adjustment.

One recent COLA was 2.8%, a boost many retirees considered too small. The next increase is a much bigger 3.6%.

That may sound like welcome news, but there is a downside.

A bigger COLA does not necessarily put you ahead

It is natural to think a larger Social Security COLA is better than a smaller one.

But the main purpose of a COLA is simply to help benefits keep up with inflation. So when checks rise by 3.6%, it is not really a bonus. It is more like a delayed adjustment for higher costs already experienced, rather than extra money arriving early.

In other words, a large Social Security COLA usually reflects a period of serious inflation. The reason this increase is so strong is that prices have been climbing sharply amid the Middle East conflict.

So the best a 3.6% COLA may do is help you avoid falling further behind inflation. If prices keep rising in the new year, even that increase may not provide much real relief.

Focus on strengthening your finances instead

You may be hoping your next Social Security increase will improve your finances. But it likely will not change your situation very much, especially if money is already tight.

Instead of depending on a COLA, look for ways to improve your finances on your own. If you need more room in your budget, a part-time job could help. It is also wise to review your spending carefully and cut back where possible.

If you own a home, downsizing may be worth considering, particularly if you can tap into some home equity. A smaller home can also mean lower ongoing costs, which may help your Social Security checks go further.

Other income ideas may also be possible, such as renting out a parking space in your driveway. The important thing is to understand what the upcoming COLA can and cannot do, so you can make better financial decisions.