Why Social Security's COLA Shortcoming Could Still Matter in 2027 Even With a Bigger Raise

Key Points

• Social Security benefits are set to rise by 3.6% in 2027.

• That increase may still not be enough to fully keep pace with inflation.

• A revised COLA formula could improve retirees' buying power, but lawmakers may be reluctant to make that change.

For Social Security recipients, the start of the new year may bring some welcome relief. Benefits are projected to increase by 3.6% when the 2027 cost-of-living adjustment, or COLA, takes effect.

That sounds like a solid improvement, especially after a 2.8% COLA in 2026. But because of a weakness in how Social Security COLAs are calculated, a 3.6% raise still may not be enough to offset inflation.

Why the current COLA formula falls short

Social Security COLAs are intended to help benefits keep up with rising prices. Many recipients collect benefits for years, and without inflation adjustments, their checks would steadily lose value.

In the past, lawmakers had to approve COLAs. Today, Social Security benefits automatically qualify for an annual adjustment.

When the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, rises year over year during the third quarter, Social Security benefits are increased too. If the index declines or stays unchanged, benefits remain flat.

The issue is that CPI-W does not closely match the expenses older adults on Social Security typically face. Retirees tend to spend differently from working households, which makes the current formula less effective.

The Senior Citizens League, an advocacy organization, says Social Security recipients have lost 13.7% of their buying power since 2016 because COLAs have not kept up adequately. That concern has led the group and other advocates to call for a different formula.

One option would be to base COLAs on the Consumer Price Index for the Elderly. That measure would give greater weight to costs such as healthcare, meaning increases in Medicare and related expenses would be more likely to show up in Social Security adjustments.

Still, there is no sign that lawmakers are preparing to revise the COLA formula anytime soon. As a result, seniors may continue facing raises that do not fully match inflation for the foreseeable future.

Set expectations realistically

People collecting Social Security may hope that 2027 will bring a noticeably easier financial picture. That may not be the case.

Even though COLAs are designed to help benefits keep pace with higher costs, they often do so only partially. That makes it important to have a backup plan, such as cutting expenses, working part time, or finding another source of supplemental income.