If you are not familiar with how it is determined, the Social Security COLA is tied to third-quarter inflation. It compares CPI figures for July, August, and September with the same months from the previous year.
Put simply, the COLA is based on inflation that has already occurred. The increase paid in January reflects prices from the prior summer, not what goods and services will cost in the year ahead.
What the 2027 COLA could mean for the typical Social Security beneficiary
The average retired worker is receiving $2,095 a month from Social Security based on the most recent data, and a 3.6% increase would lift that amount to $2,170 a month, or $75 more each month, which works out to $900 a year.
That said, Medicare has not yet announced 2027 Part B premiums. According to the latest trustees' report, they are projected to rise from $202.90 to $209.50 next year. Since most Medicare beneficiaries have those premiums deducted directly from their Social Security payments, the real increase for the average retired worker would be closer to $68 a month.
4 smart moves to make now
1. Build your budget around your actual raise
Base your spending plans on the amount that will actually reach your bank account after Medicare premiums are taken out, rather than on the 3.6% headline COLA. In early December, you will be able to see your updated monthly benefit in your My Social Security account at www.ssa.gov.
2. Review Medicare expenses
Medicare open enrollment runs from Oct. 15 through Dec. 7, and Part D and Medicare Advantage plans can change both costs and coverage from year to year. Spending an hour or so comparing plans could save you more than you expect.
3. If you have not claimed yet, think about waiting
Your Social Security benefit increases by 8% for each year you delay claiming beyond full retirement age, up to age 70, and COLAs are added even before you start collecting. If you can afford to wait, that can be one of the most attractive inflation-protected options available.
4. Protect the rest of your income
Social Security is meant to be only one part of a retiree's income. One upside of a high-inflation environment is that it can be a good time to lock in some low-risk yield. The 10-year Treasury yield is around 5%, and inflation-protected Treasuries, or TIPS, are also available, among other choices.
The bottom line
The Social Security COLA is not a perfect measure of retirees' expenses. It uses the CPI-W, which reflects the spending patterns of urban wage earners, whose costs differ from those of most retirees. For instance, retirees generally devote a larger share of their budgets to healthcare and housing than the average worker. There is a separate inflation gauge intended to track retiree expenses, known as the CPI-E, but it has not been adopted.
To be clear, a 3.6% COLA is still significant and should help support retirees' purchasing power. Even so, it is unlikely to fully match rising costs, especially when inflation is climbing. Taking some of the steps above may help narrow the gap.
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