For retirees living on just
Social Security, the program’s annual cost-of-living adjustments, or COLAs,
are extremely important. Those COLAs are designed to help Social Security
benefits keep up with inflation. And without them, many retirees would be
virtually guaranteed to lose out on buying power from year to year.
In 2026, Social Security benefits received a 2.8% COLA. Many retirees are no
doubt hoping for a much larger raise in 2027. Initial estimates are indeed pointing to a more generous 2027 Social Security
COLA so far, but a larger raise could come with a very big catch.
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Social Security benefits could rise substantially in 2027
Inflation levels have surged in the wake of the Iran conflict. In May, the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)
increased 4.4% on a year-over-year basis. The CPI-W is the measure used to
calculate Social Security COLAs.
In light of recent inflation data, independent Social Security analyst Mary
Johnson now says that the 2027 COLA could be 4.7%. If that number ends up being
accurate, next year’s Social Security raise could be one of the highest COLAs in
years. The past three Social Security COLAs came in at 3.2%, 2.5%, and 2.8%,
respectively.
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A larger Social Security COLA comes at the cost of high inflation
A more generous Social Security COLA might seem like a great thing at first. But
if you’re collecting Social Security, you should be aware that a larger COLA
will come at the cost of high inflation.
The only way for seniors to end up with a bigger COLA in 2027 is for the CPI-W
to remain elevated. If that happens, what Social Security recipients might gain
in the form of a larger raise, they’re apt to lose in the form of having to pay
more for their living expenses.
Plus, this year’s 2.8% Social Security COLA is already set in stone. If
inflation remains elevated at similar levels to May’s CPI-W, it will put many
seniors behind, since a 2.8% raise can’t easily keep up with 4.4% inflation.
A bigger Social Security COLA may not hold up well
Not only is a larger Social Security COLA apt to come at the cost of high
inflation, but it may not hold up very well due to a flaw in the way those COLAs
are calculated. The problem is that the CPI-W is not very reflective of the
costs Social Security recipients tend to face.
The CPI-W measures the spending patterns of wage earners. And people who are
part of the workforce tend to spend their money differently than retirees who
collect a monthly Social Security check.
The non-partisan Senior Citizens League reports that Social Security recipients
lost 13.7% of their buying power during the 10-year period between 2016 and
2026. The reason, the group says, is that COLAs do not keep up with real-world
inflation for seniors. The group has advocated using a senior-specific index to
measure COLA instead of the CPI-W.
It’s also worth noting that retired Americans tend to spend a larger share of
their income on health care. But health care costs have a tendency to rise at a
faster rate than inflation broadly. So this, too, puts seniors on Social
Security at a big disadvantage based on the current COLA formula, which does not
give health care costs extra consideration.
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A large Medicare hike could hurt next year’s raise, too
Another issue with the upcoming Social Security COLA is that even if benefits
rise substantially in 2027, a large increase in the cost of Medicare Part B
could wipe out a big chunk of that raise. That’s because seniors who are
enrolled in both Social Security and Medicare have their Part B premiums
deducted from their monthly benefits.
In 2026, the cost of Medicare Part B rose from $185 per month to $202.90. If
there’s a similar increase in 2027, it could eat into the upcoming COLA, leaving
retirees with less of a net raise.
Bottom line
If you’re a retiree on a tight budget, it’s important to do what you can to avoid money
mistakes. And part of that means not being too reliant on a bigger Social
Security COLA to improve your financial situation.
Even if next year’s Social Security COLA is quite substantial, it may
not actually give you more buying power, especially if inflation continues to
surge and the cost of Medicare Part B increases significantly. If you want to
see your financial picture improve, a better idea is to try to find ways to
generate income outside of Social Security. That could mean working a part-time
job, starting a business, freelancing, or even renting out a portion of your
home to secure an additional paycheck.
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