Millions of Retirees Are Getting a Big 2027 COLA - But Experts Say the Formula Shortchanges Seniors

Social Security is one of the most important senior benefits today. There are some who end up collecting Social Security for decades in retirement without any other income to fall back on. That's what makes the program's cost-of-living adjustments, or COLAs, so important.

Each year, Social Security benefits are eligible for a COLA that's tied to inflation. Previously, Congress had to vote on COLAs individually, but now, those raises come in automatically when inflation warrants an increase.

The Social Security Administration recently announced that the 2027 COLA is 3.6%, but here's why seniors may not want to celebrate that raise just yet.

What a 3.6% COLA could do for the average Social Security check

Last year, Social Security benefits received a 2.8% COLA. This year's 3.6% increase is a lot larger and could add a nice amount of money to seniors' benefit checks.

For instance, the average monthly Social Security retirement benefit today is about $2,089. So a 3.6% COLA results in a monthly boost of around $75. On a yearly basis, that's an extra $900 for the typical retiree.

Of course, this does not account for any increases in the cost of Medicare Part B. Seniors who are enrolled in both Medicare and Social Security pay their Part B premiums out of their monthly benefits automatically. If the cost of Part B goes up a lot in 2027, it could eat into the upcoming COLA.

How Social Security COLAs are calculated

You may be wondering how Social Security calculates your annual COLA. Those raises are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of the year.

When there's an increase in the CPI-W during that time, Social Security benefits go up. If the CPI-W shows a decrease in annual inflation during the third quarter of the year, benefits stay where they are. They can't decrease from year to year.

Why the current COLA formula fails seniors

The problem with the current COLA formula is that it's based on an index that does not accurately reflect the real-world costs Social Security recipients face. The CPI-W may do a good job of capturing price changes for workers, but retirees on Social Security tend to spend their money very differently.

Because of this problematic formula, the Senior Citizens League says Social Security recipients have lost out on a lot of buying power over time. Since 2016, benefits have shed 13.7% of their purchasing power, and that trend could continue if a change to the COLA formula isn't made. This mismatch could easily render the 2027 Social Security COLA less effective even though it's a pretty large increase in its own right.

What lawmakers can do to make COLAs more effective

Shifting the Social Security COLA formula to better match seniors' real-world expenses and cost increases could help benefits better maintain their buying power in the future. Advocates have long pushed for COLAs to be based on the Consumer Price Index for the Elderly so that senior-specific costs are accounted for.

However, Congress is currently tasked with preventing Social Security cuts, which could happen as early as 2032, according to a recent update from the program's Trustees. Lawmakers may not have the capacity to deal with changes to the COLA formula as they try to shore up Social Security's finances broadly.

Plus, a change that results in larger COLAs for seniors only puts more pressure on Social Security's limited financial resources. So that's another reason Social Security recipients shouldn't expect an updated COLA formula anytime soon. If the formula were to get an adjustment in the near term, it could push Social Security closer to broad cuts, ultimately leaving seniors with less money overall.

Bottom line

Your Social Security benefits may be a big part of your retirement plan. It may be ideal to be getting a 3.6% COLA in the new year, but it's important to note that the increase might not hold up well to inflation, especially if prices start to rise substantially in the new year.

Also, the Federal Reserve raised interest rates by a quarter of a percentage point in September, which means that if you have variable-interest debt, like credit card balances, your monthly payments could climb. And any new borrowing you do in 2027 could also be more expensive.

Given all of this, you may want to rethink your financial plans for 2027 and not bank on your upcoming COLA too heavily. If you're worried money may be tight, it's worth seeing if you could work part-time to supplement your Social Security checks. You're allowed to work while collecting Social Security, and the thresholds for earning money before having benefits withheld are increasing in 2027, giving you even more leeway to earn some extra money.

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