The cost-of-living adjustment provides a crucial boost for older people, many of whom live on fixed incomes. – Getty Images
Social Security’s cost-of-living adjustment could be between 3.2% and 3.6% in 2027, adding at least $67 a month to the average retiree benefit amid cooling inflation.
Estimates for next year’s COLA varied among analysts but were higher than the average increase of 2.6% seen over the last 20 years. The forecasts were also above this year’s COLA of 2.8%.
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The COLA is not a raise, but rather an adjustment to help beneficiaries keep pace with inflation. The average Social Security retirement benefit is about $2,092 a month as of June, according to the Social Security Administration.
Social Security’s COLA is determined by inflation in the third quarter of the year: July, August and September. The formal announcement of the 2027 COLA is set for October, with any increase in benefits starting in January.
The forecasts ranged from 3.2% from the Committee for a Responsible Federal Budget, a fiscal-policy think tank, to 3.4% from independent Social Security and Medicare analyst Mary Johnson, to 3.6% from the Senior Citizens League, an advocacy group.
A cooling in inflation
The forecasts come as the consumer-price index saw a seasonally adjusted increase of 0.1% during July, according to the Bureau of Labor Statistics. Excluding food and energy costs, core CPI rose 0.2%. On an annual basis, the inflation rates were 3.4% and 2.5%, respectively. The results were in line with Wall Street forecasts.
CPI is a key economic tool that tracks the average change over time in prices paid by consumers for goods and services. It is widely used by governments to measure inflation. Core CPI, meanwhile, excludes the food and energy sectors.
“We are in a brave new world of breathtakingly high prices and costs,” Johnson said.
Although increases in consumer prices are cooling, in some categories costs are still going up, including outpatient hospital care (5.8%) and services for pets, including veterinary services (4.5%). Prices for some items, meanwhile, have fallen, such as prescription drugs, which are down 3.1% for all adult consumers, Johnson said.
Energy markets and oil prices also play an important role in influencing the COLA. As of Aug. 6, oil prices were about 24% higher than at this time last year, according to the Senior Citizens League. Fuel prices impact inflation because they raise prices for producing and transporting goods, costs that get passed onto consumers.
A different view for seniors
Tying Social Security benefit adjustments to CPI, at least in its current form, has been up for debate. The agency uses the CPI-W, an index based on the prices paid by urban workers, but legislators have proposed instead using a different index, the CPI-E, which focuses on costs faced by the elderly.
“Seniors don’t experience inflation as a percentage on a chart. They experience it at the grocery store, at the pharmacy, in their insurance premiums and when they pay the rent. That’s why the size of the COLA matters, but so does how accurately it reflects their real-world expenses,” said Shannon Benton, executive director of the Senior Citizens League.
The coming year’s COLA is announced in October and goes into effect in January but reflects the inflation rate for the previous year.
“Frankly, it’s infuriating that seniors must wait for a COLA to catch up with prices that have already driven up their grocery bills, housing costs, healthcare expenses and insurance premiums. A higher COLA is welcome, but seniors shouldn’t have to lose purchasing power year after year before Washington acknowledges what they’re experiencing,” Benton said.
The increase in the amount received each month may also end up being lower — or nonexistent — for people who get both Medicare and Social Security benefits. Beneficiaries’ Medicare premiums can be deducted from their Social Security benefits, which means that rising premium costs could affect just how much of the COLA an individual sees in their check.
Social Security’s trust fund is expected to run out of money in 2032, at which point beneficiaries will receive only 78% of promised benefits unless Congress acts to shore up the system.
High COLAs can provide helpful near-term financial support to seniors, but they also impose significant costs on a Social Security retirement fund that is just six years from insolvency, the CRFB said.
