Millions of Retirees Could See a Larger 2027 COLA, Yet Experts Warn the Formula Still Undercuts Seniors

Social Security remains one of the most vital benefits for older Americans. For some retirees, it provides the bulk of their income for decades, which is why the program’s cost-of-living adjustments, or COLAs, matter so much.

Each year, Social Security benefits can rise with inflation through a COLA. In the past, Congress had to approve those increases one by one, but now they are applied automatically when inflation calls for a raise.

The Social Security Administration has announced a 3.6% COLA for 2027, though seniors may not want to celebrate just yet.

What a 3.6% COLA could mean for the typical benefit

Last year, Social Security benefits increased by 2.8%. The new 3.6% adjustment is notably larger and could put more money into retirees’ monthly checks.

For example, the average monthly retirement benefit is about $2,089. A 3.6% increase would lift that payment by roughly $75 a month, or about $900 over the course of a year for the average retiree.

That estimate does not include possible increases in Medicare Part B premiums. Seniors enrolled in both Medicare and Social Security have those premiums automatically deducted from their monthly benefits, so a sharp rise in Part B costs could reduce the value of the COLA.

How Social Security figures out COLAs

The annual COLA is based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, during the third quarter of the year.

If the CPI-W rises during that period, benefits go up. If the index falls, benefits do not go down; Social Security payments are protected from year-to-year cuts.

Why many experts say the formula misses the mark

The issue is that the current formula relies on an index that does not fully reflect the spending patterns of retirees. The CPI-W may track price changes for workers reasonably well, but people living on Social Security often spend differently.

Because of that mismatch, the Senior Citizens League says beneficiaries have steadily lost purchasing power over time. Since 2016, benefits have lost 13.7% of their buying power, and that erosion could continue unless the formula changes. Even a relatively large 2027 COLA could still fall short if inflation keeps climbing.

What lawmakers could change

One possible fix would be to tie the Social Security COLA more closely to the costs seniors actually face. Advocates have long pushed for a switch to the Consumer Price Index for the Elderly, which would better account for older Americans’ expenses.

Still, Congress is focused on preventing Social Security cuts that could arrive as early as 2032, according to a recent Trustees update. That could make it difficult for lawmakers to also tackle a major COLA formula change.

There is also a trade-off: raising COLAs further for seniors would add more strain to Social Security’s limited resources. For that reason, a formula change may not happen soon, and if it did, it could accelerate broader funding pressure on the program.

The bottom line

Social Security may be a central part of your retirement plan, and a 3.6% COLA sounds helpful. Even so, that increase may not keep up well if prices rise sharply.

Other financial pressures could also build. The Federal Reserve raised interest rates by a quarter of a percentage point in September, which means variable-rate debt such as credit card balances could become more expensive. New borrowing could also cost more.

With that in mind, retirees may want to avoid leaning too heavily on the coming COLA when planning ahead. If money could be tight, part-time work may be worth considering. People are allowed to work while collecting Social Security, and the income limits before benefits are withheld are set to rise in 2027, giving retirees more room to earn extra money.

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