A bigger cost-of-living adjustment (COLA) sounds like good news for retirees, and after two years of modest raises, it would be. The Committee for a Responsible Federal Budget (CRFB) estimates the 2027 COLA could come in around 3.8%, roughly a full point above the 2.8% adjustment retirees received this year.
That would put more money into monthly checks, but it also comes with a cost. The same estimate puts the added shortfall at about $300 billion over the next decade, because every dollar that goes into higher senior benefits is a dollar the program has to cover while Congress still hasn’t settled on a long-term fix.
Here’s how that breaks down.
Find Out: 14 moves seniors could benefit from but often forget about.
Why one percentage point costs that much
COLA increases are permanent, which means once a raise goes into effect, it becomes the new baseline, and every future adjustment builds on top of it.
Take the average monthly benefit of $2,081, for example. A 3% COLA adds about $62 a month. If the next year’s adjustment comes in at 4%, that increase applies to the already-higher amount, adding another $86. In just two years, the monthly benefit has grown by nearly $150, and the next COLA will compound on that figure too.
Across tens of millions of beneficiaries, that’s how a single percentage point can end up costing hundreds of billions over time.
Shopping for cheaper auto insurance? Enter your zip code here to get started.
What that means for the trust fund timeline
The 2025 Trustees Report projects roughly $3.6 trillion in program deficits over the coming decade, with the retirement trust fund on track to run dry around 2033. Adding $300 billion to that gap would move the projected depletion date forward by about three months, according to CRFB’s analysis.
That may not sound like much, but just a couple of years ago the official date was 2035, and it keeps moving closer.
The problem gets worse when prices are rising faster than wages. Social Security runs on payroll taxes, which are tied to what workers earn. When consumer prices rise faster than wages, COLAs go up, but the revenue coming into the program doesn’t keep pace.
One year of that mismatch is manageable, but several consecutive years of higher-than-expected COLAs would compound the added cost well beyond the $300 billion estimate. And the trust fund is in a weaker position to absorb that kind of cost than it was even a few years ago.
Congress has less room to wait than it used to
The Trustees have warned for years that the longer Congress waits, the more expensive the fix becomes, and their own projections back that up.
Making Social Security solvent today would require a 3.65 percentage point increase in the combined payroll tax rate on top of the current 12.4%.
On a $60,000 salary, that comes to about $1,095 more per year. Waiting until the trust fund is nearly empty in 2034 bumps that to $1,281, and the gap only gets larger with each year nothing happens.
A payroll tax increase is one way to close the funding hole, but Congress has other options too:
Lifting the cap on taxable earnings so higher-income workers pay in on more of their wages.
Switching the COLA formula to a slower-growing inflation measure, which would mean smaller annual raises.
Gradually moving the full retirement age back for younger workers.
With the trust fund about seven years from running dry, Congress has less time than ever to ease into a fix.
Retire like the rich: 14 ways you could build wealth in your 50s.
How this connects to your check
A bigger COLA does help in the short term, and after Medicare premium deductions, most retirees would still see a modest net gain from a 3.9% adjustment.
The concern is what happens if the trust fund runs out before Congress acts. At that point, benefits would be cut by roughly 23% across the board. On a $2,081 monthly check, that’s about $479 less each month, enough to erase years of COLA increases all at once.
The raises that help retirees keep up with grocery bills and medical costs are also adding to the program’s long-term shortfall, and Congress will eventually have to deal with both sides of that equation.
Bottom line
A bigger COLA helps retirees keep up with rising prices, which is exactly what the adjustment is designed to do. The problem is that each year of higher-than-expected raises also adds to the program’s long-term shortfall, and if prices keep climbing faster than usual for several years in a row, the compounding cost could leave Congress with less time to put a fix in place.
Retirees can’t control when or how lawmakers choose to close the funding gap, but they can make the right moves with their own filing decisions and tax planning while the program’s future is still being worked out.
Your COLA protects your buying power today. Whether the system can keep delivering that protection ten years from now depends on decisions that haven’t been made yet.
More from FinanceBuzz:
