It's been a history-making past year for America's leading retirement program, Social Security. In May 2025, the average monthly benefit check for retired workers surpassed $2,000 for the first time in Social Security's 90-year history.
Additionally, the 2.8% cost-of-living adjustment (COLA) passed along this year marks the fifth consecutive year in which benefits have climbed by at least 2.5%. It's been almost three decades since that lasted happened.
For the roughly 54 million retired workers taking home a monthly payout from Social Security, there's arguably no announcement more anticipated than the annual COLA reveal during the second week of October. While Social Security's 2027 COLA may offer recipients a pleasant surprise -- one of the largest boosts to their monthly payout in the last 25 years -- it'll almost certainly come with a catch.
Image source: Getty Images.
What is Social Security's COLA, and how is it calculated?
Social Security's COLA is the program's way of accounting for the inflationary pressures beneficiaries face and adjusting payouts to reflect them.
For example, if the cost for a large basket of goods and services increases by 3% from one year to the next, Social Security benefits would need to rise by the same percentage, otherwise program recipients wouldn't be able to buy as much (i.e., they'd lose purchasing power). Social Security's cost-of-living adjustment attempts to mirror the inflation rate and prevent a loss of buying power for program recipients.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the inflation-measuring yardstick for America's top social program. The CPI-W has over 200 weighted spending categories, allowing the index to be whittled down to a single figure at the end of each month. This makes for quick year-over-year comparisons to determine if prices are rising (inflation) or falling (deflation).
But there's a quirk with Social Security's COLA calculation: it only accounts for trailing 12-month CPI-W readings from the months ending in July, August, and September (the third quarter). If the average third-quarter CPI-W in the current year is higher than the comparable period of the previous year, inflation has occurred, and Social Security benefits will rise in the following year.
The cost-of-living adjustment is simply the year-over-year percentage increase in average third-quarter CPI-W readings, rounded to the nearest tenth of a percent.
Social Security's 2027 cost-of-living adjustment may be historically large
Early independent forecasts for the program's 2027 COLA have been rather modest. Social Security and Medicare policy analyst Mary Johnson foresees benefits rising by 1.7% next year. Meanwhile, nonpartisan senior advocacy group, The Senior Citizens League (TSCL), anticipates a "raise" of 2.8% in 2027 for beneficiaries.
However, the Iran war has the potential to completely reset these expectations.
Gas prices in the US have moved up to $3.79/gallon, their highest level since September 2023. The 30% spike over the last month ($2.92/gallon to $3.79/gallon) is the biggest we've seen in the past 30 years. pic.twitter.com/TF90U1B2C7
-- Charlie Bilello (@charliebilello) March 17, 2026
Since the U.S. and Israel began military operations against Iran on Feb. 28, oil prices have soared. According to AAA, the national average price for a gallon of regular gas has jumped 30% to $3.79, while diesel is up 38% to $5.04 as of March 17. This price shock and historic supply chain disruption following the virtual closure of the Strait of Hormuz affects consumers, trucking companies, and airlines -- and there's no definitive end in sight.
The old adage with gas prices is that they "rise like a rocket and fall like a feather." In other words, they react swiftly to the upside during shock events to supply, but often take their sweet time moving lower once an upside catalyst has passed. More than likely, we're going to see the effects of the Iran war impact the 2027 COLA calculation, even if this conflict ends relatively soon.
The last time crude oil prices surpassed $100/barrel (February 2022 – July 2022), Social Security beneficiaries received the largest monthly payout increase in 41 years: an 8.7% COLA in 2023. While there were other variables at play beyond just scorching-hot energy price increases, a near-parabolic jump in crude oil prices was responsible for a meaningful portion of this historic COLA.
When the U.S. Bureau of Labor Statistics releases the March inflation data on April 10, we're going to get our first glimpse of how impactful the historic surge in oil prices has been on the prevailing inflation rate.
Over the last 25 years, Social Security's COLA has exceeded 3.2% only five times: 2006 (4.1%), 2009 (5.8%), 2012 (3.6%), 2022 (5.9%), and 2023 (8.7%). There's a real possibility of the 2027 COLA being among the largest over the last quarter century.
Image source: Getty Images.
But wait -- there's a catch
While the prospect of a beefier monthly Social Security payout may sound like good news, the bigger picture tells a different story.
Two separate analyses from TSCL found that the purchasing power of Social Security income has cratered over time. One study showed that the buying power of a Social Security dollar declined 36% from the start of the 21st century to February 2023. The more recent analysis found a 20% drop in purchasing power for Social Security income from 2010 to 2024.
The impetus for this loss of buying power is none other than the CPI-W, which is inherently flawed.
As its full name implies, the CPI-W tracks the cost pressures and spending habits of "urban wage earners and clerical workers." These individuals are often under the age of 62 and are not currently receiving a Social Security retired-worker benefit. Even though 87% of all Social Security recipients (retired workers, workers with disabilities, and survivor beneficiaries) are 62 or older, the program's inflation-measuring yardstick is tracking the spending habits of working-age Americans.
Urban wage earners and clerical workers spend their money differently than seniors do. In particular, retirees spend a higher percentage of their monthly budget on shelter and medical care services than the average working-age American. The CPI-W doesn't reflect this weighting for retirees.
Furthermore, medical care expenses have been weighing on retirees. More often than not, Medicare's Part B premium -- Part B is the segment of Medicare responsible for outpatient services -- is rising at a significantly faster pace than Social Security's annual COLA. The Part B premium is commonly deducted from Social Security benefits.
Although soaring oil prices may lead to a historic Social Security COLA in 2027, it's not going to offset decades of withering purchasing power for Social Security income.
