The Social Security COLA Problem That Keeps Coming Back - and Why 2027 Could Be Another Disappointment

There are many seniors today who are living on just Social Security. And for people in that situation, the program's annual cost-of-living adjustments, or COLAs, are extremely important.

Social Security COLAs are meant to help benefits keep up with inflation. Since 1975, Social Security COLAs have been automatic and tied to increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The current COLA formula uses third quarter data from the CPI-W specifically.

Initial estimates are calling for a larger Social Security COLA in 2027 than the 2.8% raise seniors received at the start of 2026, but even a larger boost may not go very far.

The 2027 Social Security COLA could be substantial

Even though Social Security COLAs are based on third quarter inflation changes to the CPI-W, experts like to offer projections ahead of time to give seniors an idea of what to expect. And current estimates are pointing to a 2027 COLA that could be much larger than this year's 2.8% increase.

Independent Social Security analyst Mary Johnson estimates next year's COLA at 3.4%. Meanwhile, the Senior Citizens League thinks next year's COLA would be 3.6%.

The average monthly Social Security benefit for retirees today is about $2,086. If we take the average of the COLA estimates above and go with a 3.5% increase, a raise that size should boost the typical retirement benefit by about $73.

A larger COLA may not do seniors much good

The numbers above are only projections. The Social Security Administration won't be able to announce an official COLA until it receives CPI-W data from the entire third quarter. This means an official number can't be released until October, after the September CPI-W comes out.

But even if 2027's Social Security COLA is much larger than this year's raise, it may not help seniors keep up with their costs. And the reason boils down to a flaw in the COLA formula.

Basing Social Security COLA on the CPI-W means those raises are being calculated based on the spending habits of wage earners. But Social Security recipients, by nature, don't tend to be wage earners, or at least not full-time workers. And the spending habits and needs of older Americans tend to differ tremendously from the habits of those who are younger.

Older Americans, for example, tend to spend a large portion of their income on healthcare. On the flipside, people who are still working may spend more money on gas, which may be a more minor expense for seniors who don't commute. This mismatch has long caused problems.

In fact, the Senior Citizens League estimates that Social Security benefits have lost 13.7% of their buying power over the past decade due to flaws in the COLA formula. Advocates have pushed to base COLAs on a specific index that reflects the costs Social Security recipients actually face for this reason.

Medicare is also a factor

Another issue with the upcoming COLA is that even if it's on the larger side, Social Security recipients may not get to keep all of it. That's because seniors who are enrolled in Social Security and Medicare at the same time pay their Part B premiums out of their monthly benefits directly. If the cost of Part B increases a lot in 2027, it could chip away at seniors' COLA.

This year, the cost of Medicare Part B rose by $17.90. Even if the cost of Part B does not increase as much in the new year, whatever hike arrives is apt to erode seniors' COLA.

How to improve your financial situation if next year's COLA falls short

While initial estimates may be pointing to a larger Social Security COLA in 2027, you can't rely on that raise alone to improve your finances if you're having a hard time making ends meet right now. You're better off taking matters into your own hands, especially since the projections above are not set in stone, and a smaller COLA could be in store.

A great way to improve your finances is to seek out part-time work. You may also want to try reducing big expenses by taking steps such as downsizing or relocating to an area of the country where the cost of living is cheaper on the whole.

Reviewing your Medicare plan choices each year during fall open enrollment could be another great way to reduce your costs. You could switch Part D or Advantage plans with the goal of eking out some savings.

Bottom line

Social Security is one of the most important benefits for seniors. And a larger Social Security COLA may very well be in store for 2027.

But even if that ends up being the case, it may not improve your financial picture the way you'd expect it to. And if inflation continues to surge and the cost of Medicare Part B increases a lot in the new year, you may not end up in a better place come January. So rather than rely on a COLA, take steps to shore up your finances yourself.

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