Why the 2 8% COLA for Social Security Isn’t What It Seems
- Michael Baker
- 14 hours ago
- 12 min read
The Hidden Truth About the 2026 Social Security COLA
The Social Security Administration just announced a 2.8% cost of living adjustment for 2026, but here is what they're not telling you. With projected Medicare Part B increases, the actual raise drops to about 1.7% for the average retiree. And if you're going to be hit by IRMAA, your raise could actually be negative—you'd be losing money each month.
My name is Michael H. Baker, CFP®. I'm a CERTIFIED FINANCIAL PLANNER® professional, and I have been helping couples prepare and plan for retirement for almost two decades. I have a passion for helping people understand their options and create clarity and confidence around their retirement income plan. I hope you find the information we talk about today to be valuable for your journey.
In the next few minutes, I'm going to talk to you about three things:
First, I'm going to show you how that 2.8% cost of living adjustment can actually shrink to about 1% for some retirees—and for others, it can even be negative.
Second, I'm going to walk you through three silent killers that can eat away at your Social Security's purchasing power: Part B, IRMAA, and taxes, along with their impact on your lifestyle.
Lastly, I'm going to give you a simple action step so that you can calculate your own real cost of living adjustment and give you some food for thought on how you can think about cost of living adjustments, inflation, and taxes as they impact your retirement plan moving forward.
Let's get started.
Understanding the 2.8% COLA Announcement
Even though we have the government shutdown, they just released the cost of living adjustments for 2026. It was 2.8%. Last year it was 2.5%, so on paper, that looks like a good thing. Inflation is still a little bit higher than many people would like it to be, so seeing that 2.8% number was welcome news for many people receiving Social Security benefits.
Let's assume you're receiving a Social Security benefit of around $2,008 per month. That 2.8% increase will actually add up to about $675 more per year, or about $56 more per month. Here's the problem: that is the gross number.
We don't get to live on gross numbers. We actually have to live on the net. So when we think about cost of living adjustments and your Social Security paycheck, we actually have to think about all the things that can be deducted from that check to determine what your real raise actually looks like.
The Real Impact: Three Case Studies
Let's look at three hypothetical but close to real-world examples on how this plays out:
Mary receives $1,200 a month from Social Security. Based on these cost of living adjustments, she would get about another $34 per month.
Don gets $2,000 a month, so his cost of living adjustment looks to be around $56 per month.
Elaine has a $3,200 a month check, so she would get $90 extra per month added to her Social Security benefits.
On paper, these cost of living adjustments look good, but we have to factor in other things like Medicare Part B. Many Social Security recipients are already enrolled in Medicare, so they're most likely paying their Part B premiums from their Social Security check. You have to consider the impact that things like Part B increases can have on that check.
Now, the numbers I'm about to share with you for Medicare are hypothetical. They have not been finalized for 2026, but they were taken from previous reports, so I think they are reasonable estimates to use.
Silent Killer #1: Medicare Part B Premium Increases
The projected Part B premium increase is going to be around $21.50 (I think I saw a report that said $21.60). So let's assume that $21.50 will be the projected Part B increase for this coming year. Also remember, Part D is not necessarily standardized—those drug plans you have to pay per plan—but Part B is standardized. When you have Part B, you're going to pay a standardized Part B premium.
So let's look at how this plays out:
Mary was receiving $1,200 per month. She gets a gross COLA of about $34 per month. We take away the $21.50, and that leaves her with a net increase of $12.50—a 1% increase.
Don was getting $2,000 a month. He gets an increase of $56, take away $21.50, and the net increase is $34.50—about a 1.7% increase.
Elaine was getting $3,200 a month. $90 per month increase, take away $21.50, and Elaine gets $68.50 net for a 2.1% increase.
For an average recipient getting $2,008 per month, they get that $56 a month bump. We take away $21.50, and they're left with $34.50—1.7%.
You can see that for people who are on the lower end of the pay scale, these increases in Part B premiums can have a disproportionate impact on their cost of living. The reported cost of living adjustment was 2.8%, but if we apply Medicare Part B increases, that reduces down to about 1%. Even for folks like Elaine who are getting a much larger check, they have a serious reduction—it almost takes a full percentage point away from the reported cost of living adjustment.
But we're not done yet. Those Medicare Part B charges are only one silent killer of your Social Security check.
Silent Killer #2: IRMAA Surcharges
If you've never seen a video on IRMAA or you don't know who she is (I'm joking), IRMAA stands for Income-Related Monthly Adjustment Amount. This is a surcharge that is added to your Medicare Part B and Part D premiums based on your modified adjusted gross income. In effect, it's a way to somewhat means-test Part B and D premiums based on income.
IRMAA is also tricky because it's not based on your previous year's income—it's actually a two-year look back. For example, in 2026, IRMAA surcharges are based upon your modified adjusted gross income in 2024. So you have to be thinking about tax planning, especially as you move into your retirement years, because once you go onto Medicare, certain tax strategies and tax moves that you may be doing—either knowingly or unknowingly—could impact your future Medicare premiums.
The IRMAA Income Cliff Effect
The most difficult part about IRMAA, in my opinion, is the fact that it doesn't phase in or phase out. Once you exceed an IRMAA threshold by just $1, you pay the full IRMAA for that new threshold.
For 2026, they go back and look at your 2024 modified adjusted gross income:
If you are a single filer in 2024 and your modified adjusted gross income was over $109,000, you're going to pay that first tier of IRMAA.
If you're married filing jointly and your income was over $218,000, you will be in that first tier of IRMAA as well.
What Does That IRMAA Hit Look Like?
For Part B, your IRMAA surcharge in that first tier is going to be $82.50. Part D adds another $14.50, so the total hit is $97 per month. If you're married, that's going to be $97 per person.
IRMAA Example: Elaine and Her Spouse
What can this do to someone like Elaine, who was receiving $3,200 per month? Let's consider her spouse as well, also receiving $3,200 per month—so $6,400 per month in total Social Security benefits. Let's assume they went over that threshold in 2024 and are going to pay higher Part B and D premiums going into 2026.
Remember, their combined total COLA for the household was going to be $180 per month ($90 per person). But we have to add in these additional costs:
Medicare Part B premium increases: $43 per month
Part B premium surcharge: $165 per month
Part D surcharge: $29 per month
All in, the net result for them is actually negative. They will actually lose $57 per month when you add in these additional costs. Their Social Security raise doesn't just disappear—they go backwards.
But we're not done yet.
Silent Killer #3: Taxes on Social Security
Remember this: anytime your Social Security income increases, it will have some type of impact or increase on your provisional income. The good news is that only up to 85% of your Social Security paycheck can actually be taxed, so we still have that little freedom with 15% of the check.
Let's think about somebody like Don, who was receiving around $2,000 per month. His cost of living adjustment is going to be $56 per month. We have to think about that hypothetical Medicare Part B increase of $21.50, which reduces that COLA. But let's also say that because of additional taxes due to the increase in his provisional income, he might have a little bit extra withheld from his Social Security check—another $10 or so may be withheld just because of the way he's got his withholding set up and his increase in provisional income.
Now, instead of getting that $56 per month, he's actually going to lose the additional $21.50 plus an additional $10. That definitely compresses what his actual check increase is going to look like going into 2026. He nets out to about a 1.2% real increase, which is definitely not the 2.8% reported cost of living adjustment.
Why This Matters
"Michael, you are just throwing cold water on us and trying to bring us down. We had a great 2.8% cost of living adjustment announcement for 2026, and now you're telling us that all of this math actually says no, it's not really 2.8%—it could even be negative based on your income."
Here's why it matters to me: For years, when I've been teaching retirement income workshops and talking to people about the importance of making good Social Security claiming strategies and understanding Medicare and all of these different details around taxes and inflation, the one thing I have continued to stress is this: Yes, Social Security does have a cost of living adjustment. However, I think one of the ways that your Social Security check is going to shrink over time is going to be the increasing costs of Medicare Part B.
Now, we do have a provision in Social Security and Medicare called a "hold harmless provision," which is basically designed to prevent Medicare Part B premiums from increasing greater than the cost of living adjustment in Social Security. So there is a little bit of a buffer there. However, we do have these IRMAA brackets, and as you know, both of these programs are under stress.
One of the ways I personally think these programs are going to be impacted by rising costs in the future: I think cost of living adjustments are going to be muted, and I think Part B premiums are going to more and more claw away at whatever those COLAs may look like.
The bottom line: I think you need to have a plan to combat inflation and offset rising cost of living to help protect and defend your lifestyle—one that doesn't necessarily rely on Social Security to do the heavy lifting. We need to have other assets. We need to have a plan for inflation and protecting your lifestyle in other ways.
Action Plan: Calculate Your Real COLA
I promised to give you an action plan on what you could do to calculate your own personal actual COLA for 2026.
Take your monthly Social Security check and multiply it by 1.028. This gives you your gross increase.
Consider the Medicare Part B premium increase. You may be paying another $21.50 in Medicare Part B premiums. Subtract that from the monthly increase amount.
Factor in IRMAA if applicable. If you're going to be subject to IRMAA, you need to find your corresponding IRMAA charges for Part B and Part D and take those amounts out as well.
Think about the potential impact of taxes. If you're lucky enough to be in the 0% tax bracket, kudos to you. But if you are paying taxes in retirement (which is not a crime), just remember there is going to be a little bit of a tax impact. You can multiply the increase by 10% or 15% to give you an idea of maybe some additional tax that you may have to pay, and take that number out as well.
What you're left with should be a good estimate of what your actual cost of living adjustment is going to look like. Then you can calculate that as a percentage. It's probably going to be a far cry from the 2.8% cost of living adjustment that they announced just a couple of weeks ago.
Tax Planning Strategies to Reduce IRMAA
Now remember, IRMAA is tricky because of that two-year look back. But one thing that does happen is if you had some one-off events—like you retired from a job or something where your income is reduced—you could potentially appeal IRMAA and have that number temporarily reduced.
However, if you find yourself in a situation where you're going to be combating IRMAA kind of on a year-by-year basis because you have a higher income in retirement, there are several things you can be doing to make sure you are tax efficient:
Review Your Modified Adjusted Gross Income. If you have a tax professional or an advisor that's helping you with proactive tax planning, this is a great time of year to be doing some year-end tax planning and preparation.
Time Your IRA Distributions
Look at your IRA distributions for the year. If you are no longer required to take any distributions out and you're thinking about taking some additional money, see what the tax impact of that distribution could be. If you took it this year in 2025, or if you just deferred it a little bit into tax year 2026, that could possibly keep you underneath the IRMAA thresholds.
Evaluate Your Roth Conversion Strategy
There are people who are proponents of doing huge Roth conversions and getting it all done in one year or two years. I tend to favor a more gradual approach. I like meaningful conversions, but I like to try to spread them out over a period of time to stay tax-efficient and also be mindful of any potential IRMAA impact. Evaluate what you're doing if you're doing Roth conversions.
Time Your Capital Gains Strategically
Many people like to look at when they want to rebalance the portfolio—some people do it end of year, some people do it beginning of year. But if you know where you're going to fall this year on your projected modified adjusted gross income and you've got room for more long-term capital gains, be mindful about that. You may be able to go ahead and make some of those portfolio adjustments. But if you're bumping up against the IRMAA thresholds, remember you only have to be $1 over the threshold to pay the full IRMAA for the following year. Be mindful of when and how you're going to realize any type of capital gains.
Consider Qualified Charitable Distributions for RMDs
That's the tricky part about RMDs—the R stands for "required." You have to have that money out of the IRA account by December 31st of this year. So if you haven't taken your RMD yet, you're going to be required to take money out.
There is still hope for you if you're over age 70½ (which, if you're RMD age, you're likely over age 70½). You can do qualified charitable distributions where that money can actually go directly from the IRA to a qualified charity. You get credit for the distribution, but it does not impact your taxes. That's one way you could do this without having your income increased, which could also impact those IRMAA calculations.
Medicare Open Enrollment Considerations
One last thing: Medicare open enrollment is already underway. This is a great time of year to look at what you're doing with Medicare and see if you have the opportunity to find a new Medicare supplement or some other Medicare planning strategy that can help reduce costs. Part B premiums are likely going up, and I would imagine many Part D plans are also going to be going up. This is a great time to reevaluate your overall plan for Medicare—make sure you have a great plan first and foremost, but also that you're not overpaying for the coverage that you're getting.
Final Thoughts
I'm not trying to rain on anyone's parade here. A 2.8% cost of living adjustment sounds like a great thing, but we have to think about the details. Things like Medicare Part B, IRMAA surcharges, and taxes all ultimately impact the net amount that hits your bank account. And that's what we live on—we don't live on the gross, we live on the net.
We want to defend and protect our lifestyles in retirement, and that requires a lot of strategic thinking and long-term planning. If you'd like specific help understanding your situation or evaluating things that you could do, don't hesitate—reach out to our team and schedule your Retirement Fit Call with us today.
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