Why the 3.6% Social Security COLA May Feel More Like a Real Raise in 2027

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The 2027 Social Security cost-of-living adjustment, or COLA, may end up outpacing inflation and giving Baby Boomers more buying power next year.

If inflation eases as economists expect, the COLA could effectively function like a raise for beneficiaries, according to a new Bank of America Institute report.

The Social Security Administration said the COLA will be 3.6%, the biggest increase since 2023. It is scheduled to begin in January for most recipients and would add an average of $75 a month to retirement benefits.

Many beneficiaries are still asking whether that increase will be enough. Advocacy groups such as the Senior Citizens League say the answer is no.

"A 3.6% COLA is not enough!" John Adams, the group’s chairman, said in an email blast, adding that it will not keep up with "the rising cost of everyday essentials."

Measured by the consumer price index for urban wage earners and clerical workers, or the CPI-W, the annual inflation rate stands at 3.9%, which is above the 2027 COLA.

How the COLA stacks up against expected inflation

Looking only at current inflation is not the only way to judge the increase. In its report, the Bank of America Institute said there has historically been a relationship between the COLA and retirees’ spending in the year it takes effect.

The Social Security COLA is a standard cost-of-living increase required by federal law. It is meant to help benefits keep pace with prices. It usually does not make or break retirement finances. But when inflation is near a turning point, the increase can end up looking relatively large or small compared with inflation over the following year, senior economist David Tinsley wrote in the report.

The COLA is calculated by comparing average CPI-W inflation in the third quarter of one year with inflation in the third quarter of the previous year.

If the COLA rises faster than prices, retirees’ benefits increase ahead of inflation and can give older Americans a little more room in their budgets.

Using the 2023 COLA as the latest example, Bank of America found a connection between the 8.7% increase, which far exceeded inflation that year, and weaker spending growth among Baby Boomers and the Silent Generation.

The report suggests 2027 could be a smaller version of that pattern. "The consensus expectation is that CPI inflation is likely to cool over 2027, largely reflecting the lessening impact of higher gasoline prices," Tinsley wrote.

If that happens, benefits would rise more than prices in 2027. Still, near-term inflation is hard to forecast, and energy-price shocks remain a risk.

Tinsley’s report also points to the unusual mix of income sources among Americans age 60 and older, who may receive pensions and Social Security and who often get more income from interest, dividends and rental properties than younger people.

Low unemployment and wage growth have been major drivers of economic gains for workers, but those trends do little for people who are already retired.

Bank of America data shows that discretionary spending growth among older generations has trailed that of younger generations for about a year. That is another reason the COLA cannot arrive soon enough for tens of millions of Social Security recipients.

The report’s conclusion: If those inflation expectations prove accurate, households that depend on Social Security may see a more meaningful lift to their budgets next year than they have in recent years.