When you’re struggling with Social Security checks that aren’t going as far as they used to, learning that an above-average cost-of-living adjustment (COLA) could be on the way for 2027 feels like a cause for celebration. Don’t get me wrong — any increase is preferable to your checks remaining static.
However, there are actually a couple of pretty significant drawbacks to large Social Security COLAs that you may want to brace yourself for. You probably won’t feel them right away, but they could make your budget tighter down the road.
Image source: Getty Images.
1. It could trigger Social Security benefit taxes
Seniors can owe ordinary income taxes on up to 85% of their Social Security benefits, depending on their provisional income. This is your adjusted gross income (AGI), plus any nontaxable interest you have from municipal bonds, and half your annual Social Security benefit.
The COLA will increase your provisional income, unless you take steps to reduce your AGI, like withdrawing less money from tax-deferred retirement accounts. If that’s not possible — and it may not be if your expenses have gone up due to inflation — you could have a higher AGI as well.
This could result in a portion of your benefits being taxable, even if they weren’t in years past. Or you might wind up owing more than you did in earlier years. Make sure you budget accordingly if you’re worried about this. Talk to an accountant if you need help. You can also contact the Social Security Administration and request that it withhold taxes from your checks if you find this easier.
2. It could cause Social Security’s trust funds to run out of money sooner
Social Security is already in a precarious position, with just six years until its trust funds are expected to be depleted. It’s only staying afloat right now because it’s using the trust fund money to cover what Social Security payroll and benefit taxes do not.
A higher COLA will increase the program’s expenditures, which could cause the trust funds to run out of money sooner than expected. We won’t know whether this is true until the Social Security Administration releases its next Trustees’ Report in 2027.
Neither of these things — benefit taxes or earlier trust fund depletion — is guaranteed to happen, but you should be aware of the possibility. If either of them occurs, you may need to make changes to your future budget to maintain your financial stability.
