Approximately 65 million Americans receiving Social Security benefits saw their first increased payment arrive in January, as the 2026 cost-of-living adjustment (COLA) officially took effect. The 2.8% boost marks a significant step down from the 3.2% adjustment in 2025 and the inflation-driven 8.7% surge in 2023, signaling that the purchasing power squeeze on retirees is finally easing.

For the average retired worker, the adjustment translates to roughly $56 more per month, lifting the typical benefit from $2,015 to $2,071. Widowed spouses receiving survivor benefits will see an average increase of $52, from $1,867 to $1,919.

But before retirees start planning how to spend their windfall, there's a catch: Medicare premium increases will claim a significant portion of the COLA for many beneficiaries.

How the COLA Is Calculated

Social Security's annual COLA is determined by changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), measured from the third quarter of one year to the third quarter of the next. The formula is designed to help benefits keep pace with inflation, ensuring retirees don't lose purchasing power over time.

The 2.8% increase reflects moderating inflation in 2025, a welcome development after the price surges of 2022-2023 that strained household budgets. However, some advocacy groups argue that the CPI-W understates inflation for seniors, who tend to spend more on healthcare and housing—categories where prices have risen faster than the overall index.

Medicare's Offsetting Effect

The Centers for Medicare & Medicaid Services announced that 2026 monthly Part B premiums will climb to $202.90—an increase of $17.90 from the prior year. The annual Part B deductible will also rise by $26, to $283.

For retirees enrolled in Medicare Part B (which covers doctor visits and outpatient care), these premium increases effectively reduce the net benefit of the COLA. A retiree receiving the average benefit will see their $56 monthly increase reduced to roughly $38 after accounting for the higher Medicare premium.

"It's the annual squeeze that retirees have come to expect," said Robert Carlson, a retirement planning specialist at Financial Independence Network. "The COLA gives, and Medicare takes a portion back. The net gain is still positive, but it's not as generous as the headline number suggests."

Other Key Changes for 2026

Beyond the basic COLA, several other Social Security rules are changing in 2026:

Higher Earnings Limit for Working Beneficiaries

Retirees who continue working while receiving Social Security before their full retirement age (FRA) face an earnings test that reduces benefits if income exceeds certain thresholds. In 2026, that threshold rises to $24,480, up from $23,400 in 2025.

For every $2 earned above this limit, $1 in benefits is withheld. However, those withheld benefits are not lost—they're added back to your monthly payment once you reach FRA.

Maximum Taxable Earnings Increase

The maximum amount of earnings subject to Social Security payroll taxes rises to $176,100 in 2026, up from $168,600 in 2025. High earners will see slightly larger FICA deductions as a result.

Benefit Adjustments for New Claimants

Workers turning 62 in 2026 will have their benefits calculated using updated "bend points"—the thresholds that determine how much of their average indexed monthly earnings translate into benefits. The adjustments are designed to maintain the replacement rate of Social Security relative to pre-retirement income.

The Broader Retirement Savings Picture

Social Security adjustments are just one piece of the 2026 retirement puzzle. Several other changes took effect on January 1 that could benefit savers:

401(k) Contribution Limits Rise

The IRS increased contribution limits for 401(k), 403(b), and governmental 457 plans to $24,500 in 2026, up from $23,500 in 2025. The IRA contribution limit also rose to $7,500 from $7,000.

Catch-up contribution limits for workers aged 50-59 and 64+ increased to $8,000, for a total contribution cap of $32,500. The "super catch-up" for workers aged 60-63 remains at $11,250, allowing total contributions of $35,750.

Mandatory Roth Catch-Up Rule

A significant change from the Secure 2.0 Act kicks in for 2026: workers aged 50 and older who earn more than $150,000 must now make catch-up contributions on an after-tax Roth basis in employer-sponsored plans. This affects high earners who previously could make pre-tax catch-up contributions.

HSA Contribution Increases

Health Savings Account limits rose as well, with individual coverage limits at $4,400 and family coverage at $8,750. The $1,000 catch-up contribution for those 55 and older remains available.

Long-Term Care Insurance Exception

A new provision from the Secure 2.0 Act allows penalty-free withdrawals from retirement accounts to pay for long-term care insurance. Starting December 29, 2025, savers under 59½ can pull up to $2,500 per year from IRAs, 401(k)s, and other retirement plans to cover premiums for qualifying long-term care policies.

Planning Considerations for Retirees

For current retirees, the 2026 COLA offers modest relief from inflation pressures. Here are steps to maximize the benefit:

  • Review Medicare options: If your current Medicare plan has become too expensive, consider switching during open enrollment periods. Medicare Advantage plans may offer lower premiums in some cases.
  • Optimize Social Security timing: For those who haven't yet claimed, delaying benefits can increase monthly payments by 8% per year until age 70.
  • Manage taxable income: Up to 85% of Social Security benefits can be taxable depending on total income. Strategic withdrawal planning from retirement accounts can minimize the tax bite.
  • Budget for healthcare inflation: Healthcare costs typically rise faster than general inflation. Building a larger healthcare spending buffer into retirement budgets is prudent.

The Bottom Line

The 2.8% Social Security COLA is a welcome, if modest, increase for the 65 million Americans who depend on these benefits. While Medicare premium increases will offset some of the gain, most retirees will still see a net improvement in their monthly income.

Combined with higher retirement account contribution limits and new savings incentives, 2026 offers opportunities for both current retirees and those still building their nest eggs. The key is understanding how all the pieces fit together—and planning accordingly.