Key Points
-
Social Security benefits are rising by 3.6% in 2027.
-
Even an increase that large might fall short in keeping up with inflation.
-
A new COLA formula could give Social Security recipients more buying power, but lawmakers may be hesitant to implement such a change.
-
If you’re on Social Security, you may be excited for January to arrive. At that point, benefits are expected to rise by 3.6% as the 2027 cost-of-living adjustment, or COLA, takes effect.
Given that 2026’s Social Security COLA only came in at 2.8%, a 3.6% increase reads like a welcome change. But due to a flaw in the way Social Security COLAs are calculated, a 3.6% raise may not help you keep up with inflation in the new year after all.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
The purpose of Social Security COLAs is to help benefits keep up with inflation. There are many Social Security recipients who collect benefits for decades. Without an inflation adjustment, those checks would be guaranteed to lose purchasing power over time.
COLAs used to get voted in by lawmakers. Now, Social Security benefits are eligible for a COLA each year automatically.
When there’s a year-over-year increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, during the third quarter of the year, Social Security benefits increase as well. When there’s a decrease or the CPI-W remains flat, Social Security benefits stay the same.
The problem is that the CPI-W does not accurately reflect the costs seniors on Social Security tend to face. Retirees on Social Security tend to spend their money very differently than wage earners, which makes the current formula less effective.
The Senior Citizens League, an advocacy group, says Social Security recipients have lost 13.7% of their buying power since 2016 due to insufficient COLAs. The group, along with other advocates, has pushed for a change to the COLA formula as a result.
Basing Social Security COLAs on the Consumer Price Index for the Elderly, for example, could help benefits better keep up with rising costs. That index would give categories like healthcare more representation, so that when Medicare and related costs rise, the increases are reflected in the COLAs Social Security benefits receive.
Unfortunately, there’s been no indication that lawmakers are looking to change the Social Security COLA formula anytime soon. So seniors may have to grapple with somewhat ineffective raises for the foreseeable future.
Have realistic expectations
If you’re on Social Security, you may expect to be in a more comfortable financial position in 2027. But that may not happen.
It’s important to realize that, even though Social Security’s COLAs are meant to help benefits keep up with rising costs, they often fail to do so to some extent. Having a backup plan is therefore key. That plan could include reduced spending, part-time work, or another type of supplemental income.
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.
