Key Points
-
Social Security benefits will soon get their largest increase in years.
-
While a 3.6% COLA might seem generous, it may not keep pace with real-world inflation for retirees.
-
A flaw in the COLA formula has long caused benefits to lag behind inflation.
-
Not long ago, the Social Security Administration announced that benefits will get a 3.6% cost-of-living adjustment, or COLA, in 2027. And if you’re on Social Security and are excited for that raise to come through, that’s understandable.
That 3.6% COLA is the largest boost to Social Security benefits to arrive in years. And it well outpaces the 2.8% COLA that arrived back in January.
Missed AI’s “Act 1”? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
But if you’re hoping your 3.6% COLA will hold up well to inflation, there’s disappointing news. COLAs have a history of letting seniors down, and 2027 may be no exception.
Why COLAs don’t tend to hold up
The Senior Citizens League, an advocacy group, analyzed Social Security COLAs compared to rising costs over the past decade. It found that since 2016, Social Security benefits have lost 13.7% of their purchasing power due to insufficient COLAs.
The problem largely boils down to how Social Security COLAs are calculated. Those annual increases are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of the year.
When the CPI-W rises for that period, Social Security benefits increase accordingly. If there’s a decrease in the CPI-W, benefits stay flat.
The issue is that the CPI-W does not accurately reflect the costs Social Security recipients face. The index, as its name explicitly states, measures the costs faced by wage earners.
Seniors tend to spend their money differently. Healthcare is often a major part of retirees’ budgets, and it tends to rise faster than inflation.
For this reason, Social Security’s COLAs have not held up well over time. The Senior Citizens League and other advocates have long pushed for a different way to calculate COLAs. Their preference is to use the Consumer Price Index for the Elderly, which, unlike the CPI-W, focuses on the spending habits of older Americans.
What to expect out of your 2027 COLA
You may be eager to see your 3.6% raise hit your Social Security checks in 2027. But it’s important to have realistic expectations. And if you realize at any point during the new year that your COLA isn’t holding up, it’s important to take steps to improve your financial outlook.
You may want to consider returning to work in some form if you need extra money to keep up with rising costs. Relocating to a more cost-efficient part of the country may also be worth considering, though you’ll need to do a break-even analysis that accounts for the cost of moving, which could be high.
No matter what you do, don’t assume your 2027 COLA will help you maintain your buying power. If history tells us anything, it’s that Social Security COLAs don’t actually do the job they’re meant to do.
The $23,760 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Join Stock Advisor to learn more about these strategies.
View the “Social Security secrets” »
The Motley Fool has a disclosure policy.
