There are always a few dates that Social Security retirees should mark on their calendars every year, and one of them is fast approaching.
A big part of the Social Security program is the annual cost-of-living adjustment (COLA), which determines how much a retiree’s benefits will increase the following year. The goal of the COLA is to maintain the purchasing power of benefits in the face of inflation.
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Projected estimates for the 2027 COLA have bounced around all year long, but on Oct. 14, retirees will finally gain some clarity.
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COLA season is winding down
Retirees are in the midst of COLA season, which occurs in the third quarter of each year from July through September.
Because the purpose of the COLA is to maintain the purchasing power of Social Security benefits, the way the COLA is determined is through inflation data. Essentially, the Social Security Administration (SSA) and other stakeholders want benefits to rise in tandem with overall inflation.
While the market focuses on inflation metrics such as the Personal Consumption Expenditures (PCE) Price Index and the Consumer Price Index for All Urban Consumers (CPI-U), the COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The CPI-W is a subset of the CPI-U and is intended to better reflect the prices of goods and services that are more relevant to retirees, although whether this benchmark actually achieves this is heavily debated among Social Security experts.
The SSA calculates the following year’s COLA by averaging the CPI-W for July, August, and September and comparing it to the three-month average from the previous year. The percentage difference is the next year’s COLA, and COLAs can never be negative.
Where does the COLA watch stand?
As mentioned, COLA projections have fluctuated significantly this year due to shifts in inflation expectations. At the very beginning of the year, investors expected inflation to subside and return to the Federal Reserve’s 2% target, paving the way for multiple interest rate cuts this year. But then the Iran war happened, leading to soaring oil prices, which have driven up inflation.
Even excluding gas and food prices, core inflation has not yet shown a clear trend toward 2%, prompting the Federal Reserve to unanimously raise its benchmark overnight lending rate by a quarter point recently.
As a result of all this, COLA expectations have increased. In July, the CPI-W rose 3.4% on a year-over-year basis. In August, the CPI-W rose 3.5%. The nonpartisan Senior Citizens League (SCL), which closely monitors Social Security developments, now predicts the 2027 COLA at 3.5%.
Based on data from August, a 3.5% COLA would increase the average retired worker’s monthly check by about $73 to roughly $2,161 per month, or by $876 annually, to total annual benefits of $25,927. A 3.5% COLA would be the highest since 2022, when benefits rose an unprecedented 8.7% due to the highest inflation in 40 years.
On Oct. 14, the U.S. Bureau of Labor Statistics will release the September reading of both the CPI-U and CPI-W, providing the final puzzle piece regarding the 2027 COLA. The Federal Reserve Bank of Cleveland’s Nowcasting tool currently projects the CPI-U to rise 0.5% in September and be up nearly 3.6% year over year. That would be the highest reading since May.
Because the CPI-W is a subset of the CPI-U, it will likely be similar to whatever the CPI-U ultimately is. Oil prices have jumped this month amid volatility in negotiations between the U.S. and Iran, but as of this writing on Sept. 28, they are higher than at the start of the month.
Retirees should wait until the final CPI-W number is released before budgeting expenses for next year. They should also remember that a higher COLA is a double-edged sword. Sure, it increases benefits, but it also means the cost of living has risen, so retirees should remember to account for this when budgeting and not necessarily treat a higher COLA as more money to spend.
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