Social Security COLA Not Keeping Up With Retiree Costs

The Moment the Numbers Stopped Adding Up

Last October, a long-time client of mine — I’ll call her Margaret — sat across from me with a yellow legal pad covered in handwritten numbers. She’s 71, lives alone in a modest ranch home outside Columbus, Ohio, and has done everything right. She worked 38 years as a school administrator. She saved. She delayed Social Security until 67. She kept her mortgage manageable and paid it off in 2019.

And yet, Margaret was losing ground.

“Robert, I did the math three times,” she told me, tapping her pen against the pad. “My Social Security went up $58 a month this year. But my Medicare Part B premium went up $10, my Medigap plan went up $31, and my Part D premium went up $12. That’s $53 gone before I buy a single grocery.”

She was left with an extra $5 per month — roughly 17 cents a day — to cover everything else that got more expensive: food, property taxes, homeowners insurance, gas, and the two prescriptions she started last year for blood pressure and cholesterol. Margaret isn’t struggling in the dramatic way that makes headlines. She’s struggling in the slow, grinding way that millions of American retirees recognize: the math just doesn’t work anymore.

In my 20 years as a CPA and Enrolled Agent working primarily with retirees, I’ve watched this gap between the Social Security COLA and actual retiree expenses widen into something that demands a real strategy — not just hope that next year’s adjustment will be better.

Why the Social Security COLA Keeps Missing the Mark

The Social Security cost-of-living adjustment is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as CPI-W. Here’s the fundamental problem: that index tracks spending patterns of working-age urban households, not retirees. It weights categories like commuting costs, work clothing, and education expenses that most people over 65 barely spend on.

What it underweights is healthcare — the single largest and fastest-growing expense category for Americans over 65. The Bureau of Labor Statistics has an experimental index called the CPI-E (Consumer Price Index for the Elderly), which consistently shows that seniors experience inflation 0.2 to 0.5 percentage points higher than what CPI-W captures. That gap may sound small, but compounded over a 20- or 25-year retirement, it’s devastating.

The 2025 Social Security COLA came in at 2.5%. Meanwhile, healthcare costs for seniors rose by an estimated 5.1% over the same measurement period, according to data from the Kaiser Family Foundation. That means the very expense consuming the largest share of a retiree’s budget is growing at more than double the rate of the adjustment designed to keep pace with it.

The Cumulative Damage Is What Hurts Most

One bad year is manageable. But this pattern isn’t new. Let me walk through what I’ve calculated for clients like Margaret over the past decade:

• From 2015 to 2025, cumulative Social Security COLA adjustments totaled approximately 27%.
• Over that same period, Medicare Part B premiums rose roughly 52%, from $104.90 to $185.00 per month.
• Average Medigap Plan G premiums for a 70-year-old increased by 40-65%, depending on the state.
• Prescription drug out-of-pocket costs for seniors rose by an estimated 35-50%, even before the Inflation Reduction Act’s $2,000 cap took effect in 2025.

When your raise covers 27 cents of every new dollar you need, you’re not treading water — you’re slowly sinking. And this is exactly why seniors are depleting retirement savings faster due to inflation than anyone projected even five years ago.

The 2027 COLA Projection: Relief or Mirage?

Recent estimates suggest the 2027 Social Security COLA could jump to 4.7%, driven largely by rising tariff-related import costs and persistent food and energy price increases. On the surface, that sounds like welcome news. And for many retirees, a larger adjustment will provide genuine breathing room.

But I want to be honest with you: one strong COLA year doesn’t fix a structural problem. What I see most often in my practice is retirees making the mistake of treating a higher COLA like a raise rather than recognizing it as partial catch-up for ground already lost. If your expenses grew 5-6% the year before and your COLA was 2.5%, a 4.7% adjustment the following year still leaves you behind on a cumulative basis.

There’s also a hidden trap in higher COLAs that many retirees don’t anticipate: IRMAA — the Income-Related Monthly Adjustment Amount. When your combined income (including Social Security benefits) crosses certain thresholds, your Medicare Part B and Part D premiums spike dramatically. For 2025, a single filer with modified adjusted gross income above $106,000 starts paying surcharges. A bigger Social Security check can, paradoxically, push some retirees into a higher IRMAA bracket, clawing back a portion of that increase.

The Social Security Trust Fund Elephant in the Room

The 2025 Trustees Report, released in early June 2025, confirmed what many of us have been watching: the Old-Age and Survivors Insurance (OASI) trust fund is now projected to be depleted by approximately 2033. At that point, incoming payroll tax revenue would only cover about 79% of scheduled benefits.

I want to be clear — Social Security is not “going broke” in the sense that checks will stop entirely. But a 21% across-the-board reduction would be catastrophic for the roughly 40% of retirees who depend on Social Security for more than half their income. The Trustees also noted that recent policy changes, including shifts in immigration enforcement and trade policy, have modestly worsened the financial outlook by reducing projected payroll tax revenues.

This isn’t about politics for me as a tax professional. It’s about math. And the math says retirees need a plan that doesn’t rely solely on Congress solving this before 2033. If you’re still operating under common Social Security myths, now is the time to get clear on the facts.

What’s Actually Eating Retiree Budgets Alive

When I sit down with clients for annual reviews, I ask them to track every dollar for 90 days before our meeting. The results are remarkably consistent across income levels. Here are the categories where retirees are getting squeezed hardest:

Healthcare: The 800-Pound Gorilla

Fidelity’s 2024 Retiree Health Care Cost Estimate pegged the average 65-year-old couple’s lifetime healthcare costs at $330,000 — and that doesn’t include long-term care. What surprises many of my clients is how the smaller, recurring costs add up: a $45 specialist copay here, a $280 quarterly dental bill there, new glasses every two years, hearing aid batteries, and the endless parade of Medicare Supplement premium increases.

The Medicare system is complicated by design, and Medicare Advantage enrollment trends are shifting significantly in 2026, with some plans reducing benefits and narrowing networks. If your MA plan changes its formulary or drops your cardiologist, the financial disruption goes far beyond what any COLA can absorb.

Housing Costs That Were Supposed to Be “Fixed”

Even retirees who paid off their mortgages aren’t immune. Property taxes have surged in many Sun Belt and suburban markets. Homeowners insurance — if you can even get it in parts of Florida, Louisiana, Texas, or California — has increased 30-60% in the past three years. Maintenance on an aging home doesn’t get cheaper either. I often tell my clients that aging in place costs more than most people expect, and that underestimating these costs is one of the most common retirement planning mistakes I encounter.

Food and Transportation

Grocery prices are up roughly 25% since 2020, according to Bureau of Labor Statistics data. While the rate of food inflation has slowed, prices haven’t come back down — and they won’t. For retirees on fixed incomes, this is a permanent reset to a higher baseline. Transportation costs, including car insurance, have risen even faster, with auto insurance premiums up over 20% nationally in the past year alone.

Strategies That Actually Work: A CPA’s Playbook

Here’s where I want to shift from diagnosis to treatment. Because while the Social Security COLA problem is structural and largely out of your control, your response to it doesn’t have to be passive. These are the strategies I implement most frequently with my own clients.

Strategic Roth Conversions in the “Gap Years”

If you’ve retired but haven’t yet started Social Security or reached age 73 (when required minimum distributions kick in under SECURE 2.0), you’re likely in the lowest tax brackets you’ll ever see. These gap years — typically ages 62 to 72 — are golden opportunities to convert traditional IRA money to Roth IRA money at bargain tax rates.

Why does this matter for the COLA problem? Because Roth distributions don’t count toward your IRMAA calculation, don’t make your Social Security benefits taxable, and give you tax-free income that isn’t subject to future rate increases. I’ve seen clients save $40,000 to $80,000 in lifetime taxes through disciplined Roth conversion strategies executed during these years.

The key is running the numbers carefully — or having a CPA or EA do it for you — to convert just enough each year to fill up your current tax bracket without spilling into the next one. The IRS doesn’t send you a thank-you note for overpaying, and an aggressive conversion that triggers IRMAA surcharges defeats the purpose.

IRMAA-Aware Withdrawal Sequencing

Most retirees I meet have money in three buckets: taxable (brokerage accounts), tax-deferred (traditional IRAs and 401(k)s), and tax-free (Roth IRAs). The order in which you draw from these buckets can save or cost you tens of thousands of dollars over a retirement.

What I see most often is retirees defaulting to taking from whatever account is most convenient, without considering the downstream effects on Medicare premiums, Social Security taxation, or even their state income tax liability. A carefully sequenced withdrawal plan can keep your MAGI below IRMAA thresholds while providing the same after-tax income.

Inflation-Resistant Income Streams

Because Social Security’s COLA is unreliable as your sole inflation hedge, I encourage clients to build at least one additional income stream that adjusts with inflation:

• Treasury Inflation-Protected Securities (TIPS): These U.S. government bonds adjust their principal based on CPI changes. They won’t make you rich, but they directly hedge inflation risk — which is exactly the problem we’re solving.
• I Bonds: You can purchase up to $10,000 per person per year (plus more with your tax refund). The current composite rate adjusts every six months, and they’re backed by the full faith of the U.S. government.
• Dividend-growth stocks or funds: Companies with long track records of increasing dividends — think 25+ consecutive years — provide a rising income stream that has historically outpaced inflation. As Investopedia notes, dividend aristocrats have been a cornerstone of many retirement income strategies for exactly this reason.
• Short-term bond ladders: In today’s interest rate environment, building a ladder of 1- to 5-year Treasury or investment-grade corporate bonds lets you reinvest at current rates as each rung matures.

Aggressive Medicare Plan Review — Every Single Year

I cannot emphasize this enough: reviewing your Medicare coverage during Open Enrollment (October 15 through December 7) is one of the highest-value hours you will spend all year. Drug formularies change. Plan premiums change. Provider networks change. I’ve seen clients save $1,200 to $3,000 annually just by switching Part D plans based on their current prescriptions.

If you’re on Medicare Advantage, pay especially close attention in 2026. Insurer reimbursement changes and risk adjustment modifications are leading some plans to scale back supplemental benefits like dental, vision, and hearing coverage. Don’t assume next year’s plan looks anything like this year’s.

Protecting What You’ve Built

There’s another dimension to the COLA shortfall that doesn’t get enough attention: when retirees feel financially squeezed, they become more vulnerable to fraud. Desperation makes people susceptible to “guaranteed return” schemes, fake government agency calls, and too-good-to-be-true investment offers. If you’re feeling the pinch of rising costs, please take a few minutes to review how to protect yourself from financial scams targeting older adults. The losses from fraud are permanent and devastating in a way that inflation isn’t.

Also consider a simple but powerful step: schedule a comprehensive financial review with a fee-only fiduciary advisor or a CPA who specializes in retirement planning. Not someone who wants to sell you an annuity over a free steak dinner — a professional who charges transparently and is legally required to act in your interest.

Margaret’s New Plan

Back to Margaret. After our meeting last fall, we made three changes. First, we initiated a modest Roth conversion — $18,000, carefully calculated to stay within the 12% bracket. Second, we switched her Part D plan during Open Enrollment, saving her $37 per month on her two prescriptions. Third, we moved $40,000 from a low-yield savings account into a 2-year Treasury ladder yielding over 4.5%.

None of these moves were dramatic. None of them required her to take on meaningful risk. But combined, they’ll put an estimated $3,800 back into her pocket in 2025 — roughly the equivalent of a 6.4% raise on top of her Social Security COLA. That’s more than the COLA itself delivered.

“I finally feel like I’m not just watching it slip away,” she told me at our January check-in.

That’s the thing about the Social Security COLA shortfall. You can’t control the formula. You can’t control Congress. You can’t control what Medicare charges next year. But you can control your tax strategy, your investment allocation, your plan selections, and whether you have a professional in your corner who understands the full picture.

The gap between what Social Security gives you and what retirement actually costs isn’t going to close on its own. But with the right moves, you don’t have to let it define your retirement.