The Backwards Social Security COLA Rule That Will Likely Short-Change Seniors (Again) in 2027

There is an irony at the heart of the Social Security program that results in smaller payments to retirees.

The program's annual cost-of-living adjustments (COLAs) are based on a backward rule that ultimately shortchanges seniors living on just Social Security.

Find out more about this rule and whether there is any hope of it changing in the future.

How the Social Security COLA is calculated

Each year, the Social Security Administration (SSA) decides whether to give seniors larger monthly Social Security payments. The larger payments are intended to ensure that Social Security benefits keep pace with overall inflation.

To determine the amount of the increase, the SSA looks at the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) and compares the third-quarter (July through September) CPI-W data against data from one year prior.

If the index is higher, the SSA is likely to grant a COLA based on the size of the change. If the index is largely flat or even falling, the SSA may only give out a small COLA or even no increase at all.

Why the current Social Security COLA rule is backward

The CPI-W is an index built on the spending of urban wage earners and clerical workers. By definition, this excludes most retiree households.

Critics have pointed out this mismatch and suggested that it would be more appropriate to use a separate index known as the Consumer Price Index for Americans 62 years of age and older, or CPI-E.

This index follows the spending patterns of Americans who are 62 and older.

How the CPI-E could be a better way to calculate Social Security COLAs

Both the CPI-W and the CPI-E track spending categories such as food, housing, transportation, and health care. However, the CPI-E weights the categories to reflect what seniors spend on things such as heavier and faster-rising health care costs.

For this reason, some experts feel the CPI-E would be a better choice to use when calculating Social Security COLAs. It is worth noting that basing COLAs on the CPI-E typically would produce higher COLAs in most years.

The Senior Citizens League estimates that a senior who retired in 2024 would receive about $12,000 more in Social Security payments over a 25-year period if the CPI-E was used to calculate COLAs.

Why a switch to the CPI-E is unlikely

Of course, the reality is that any move that would significantly increase monthly payouts is probably a nonstarter in Congress today. The Social Security system is already in financial trouble. The latest report from the Social Security trustees forecasts the Old-Age and Survivors Insurance (OASI) trust fund to run out of money by the end of 2032.

At that point, payroll tax revenue would only fund about 78% of scheduled benefits.

A switch to using the CPI-E to calculate COLAs would only exacerbate Social Security's financial woes.

What this means for seniors

Currently, some well-respected Social Security watchers are predicting a 2027 COLA of around 3.8%. That would top the 2026 COLA of 2.8%. But even a 3.8% bump would likely leave many seniors short of the money they need to meet the impact of today's inflationary environment.

Both fixing the current state of Social Security's finances and switching to the CIP-E to calculate COLAs would require acts of Congress. Few observers think that's likely anytime soon.

Of course, Social Security is likely to face reform at some point, and it's possible that a switch to using the CIP-E could get folded into broader Social Security reform legislation at a time in the future.

How to boost your finances during retirement

Both the amount of future COLAs and how they are calculated remain outside of the control of America's seniors. So, it makes more sense to look at the things you are able to control in terms of building a more solid financial foundation. One of the best ways to increase the size of your Social Security payout is to delay filing for benefits until you are older.

Those who were born in 1960 or later and who claim Social Security at age 62 see their monthly benefit reduced by 30% compared to those who claim at 67, which is known as "full retirement age." In addition, for each year you delay filing for benefits between 67 and 70, your monthly payout increases by 8%.

Another way to boost your bottom line is to take on part-time work or to develop a side hustle. Finally, sticking closely to a budget helps ensure you don't spend recklessly. The more you save from year to year, the more financially secure your overall retirement is likely to be.

Bottom line

The method used to calculate Social Security COLAs may seem a bit unfair, but it is unlikely to change any time soon. Rather than being upset over this reality, take charge of your own finances and do what is necessary to build a bigger nest egg.

The more money you have in savings, the more you should be able to withstand economic downturns and other crises that come your way, and the less you need to rely on Social Security COLAs to get by.

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