Key Points
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COLAs are supposed to help ensure benefits keep pace with inflation.
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Retirees are losing ground because of the COLA formula.
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This issue is likely to be a problem again in 2027.
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Social Security retirees are supposed to be protected from losing buying power by cost-of-living adjustments (COLAs), which are applied automatically in most years. Unfortunately, there is a problem with the COLA formula that has resulted in retirees likely getting hurt financially.
This is probably going to be an issue again with the 2027 COLA. Here’s what the problem is, along with some details on why it’s leaving seniors struggling with rising prices.
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This is the big problem with the COLA
The problem with the Social Security cost-of-living adjustment (COLA) has to do with the formula that is used to calculate it.
The benefits adjustment is supposed to help retirees keep pace with inflation. But it is calculated using third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the Q3 CPI-W data shows that prices are up year over year, retirees get a raise equal to the percentage increase.
The problem is, since the spending habits of urban wage earners and clerical workers tend to differ in major ways from the spending habits of retirees, benefits often do not increase by the necessary amount to protect retirees from feeling the effects of rising prices.
For example, seniors tend to spend much more of their monthly income on healthcare and housing compared with urban wage earners and clerical workers. Inflation is often much higher than average in these spending categories.
But since CPI-W doesn’t weigh these categories as heavily, Social Security benefits often increase by less than would be necessary to truly ensure that seniors don’t lose buying power year after year.
How much ground have retirees lost?
There are very real consequences of this COLA rule. Benefits end up buying less for retirees each year, often leaving seniors struggling with high prices. For example, The Senior Citizens League (TSCL) data revealed around a 20% loss in buying power from 2010 to 2024.
This is a dramatic decline. In fact, TSCL indicated average payments would need to increase $4,440 per year or $370 per month in order to regain the value lost.
Retirees may face the same issue in 2027
Unfortunately, this problem is not likely to go away any time soon. Retirees are likely on track for a 3.5% COLA in 2027. But since the same flawed formula is being used to calculate the benefit increase, it may fall short again.
Inflation has also been trending up this year. If that trend continues, prices may end up increasing more than expected after Q3 has come to a close.
The COLA will have already been calculated for 2027, though, and it won’t change after the fact. So, seniors may find themselves with a cost-of-living adjustment that leaves them falling further and further behind.
Retirees need to be aware of this issue with the benefit increase and should make sure they are watching their budgets, maintaining a safe withdrawal rate from retirement plans, and taking steps to ensure their money stretches as far as possible despite a COLA that’s likely to disappoint.
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