Key Points
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The 2027 COLA may not be as large as some earlier estimates suggest.
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A smaller COLA would mean Social Security checks don’t increase by as much in 2027.
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This could actually be a good thing for retirees, as a smaller COLA means inflation isn’t as high.
For millions of retirees who count on Social Security to help them make ends meet, a big benefits increase may sound like a good thing.
So when the Senior Citizens League, a senior advocacy group, recently lowered its 2027 COLA prediction from 3.8% to 3.6%, some seniors may have been disappointed.
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The reality is that this more conservative estimate is actually good news for older Americans. Here’s why.
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A smaller COLA is a better outcome for seniors for one key reason
There’s a very simple reason that a smaller Social Security cost-of-living adjustment (COLA) can be much better for retirees than a big benefits bump: The COLA isn’t calculated at random. It is based on inflation.
Specifically, the Social Security Administration reviews third-quarter data from the Bureau of Labor Statistics. The SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a price index that measures changes in the cost of a basket of goods and services. If prices are rising, retirees receive a benefit increase based on the average CPI-W increase over the relevant three months (July, August, and September).
Since the COLA formula results in Social Security benefits increasing by a specific percentage based on how much prices have gone up, a larger COLA is possible only if prices are rising rapidly. Retirees don’t gain more buying power from this larger benefit increase. They need that extra increase to maintain the buying power they already have as prices climb.
Inflation isn’t usually good for savers
While Social Security benefits increase automatically to help retirees keep pace with price increases, most retirees don’t rely on Social Security alone. They have other income sources, such as savings accounts and retirement plan balances. The problem is that these other accounts generally don’t automatically keep pace with inflation.
While a retiree may have their 401(k) invested and earn returns that help offset inflation, their portfolio may still lose buying power if they are invested conservatively and their returns don’t beat inflation. And savings accounts will often lose ground when inflation is surging. So, retirees could see the real value of their other income sources decline substantially when inflation is high enough to trigger a large COLA.
On the whole, many seniors will end up worse off due to those rapid price increases, and the larger COLA only goes so far in offsetting them, as Social Security replaces only around 40% of preretirement income.
For this reason, older Americans and anyone collecting Social Security should hope for a smaller raise and should be happy that the latest estimates show that’s the most likely outcome. It will likely leave them better off in the end.
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