Inflation, though a natural part of the economy, affects everyone differently, but it can disproportionately affect Social Security recipients because their benefits are fixed for the year. That's why Social Security has an annual cost-of-living adjustment (COLA).
The annual COLA is intended to offset inflation by boosting recipients' benefits at the beginning of each year. We won't know the official COLA for 2027 until the Social Security Administration (SSA) releases it on Oct. 14, but estimates suggest what it could be.
As it stands, senior advocacy group the Senior Citizens League (TSCL) estimates the 2027 COLA will be 3.6%, down from the 3.9% it projected a few months ago. On one hand, Social Security recipients might not be excited about the lower projection. On the other hand, it could hint at the current state of inflation.
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How the annual COLA is determined
The COLA is based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It measures changes in prices in common goods and services experienced by urban households in which more than half the income comes from hourly wage work. This includes everything from housing and transportation to food, clothing, gas prices, and more.
First, the SSA looks at the average CPI-W for the third quarter of the current year. Then it compares that average to the previous year's third-quarter CPI-W average. Finally, it sets the COLA as the percentage increase, rounded to the nearest tenth of a percentage.
If the average is the same as or less than the previous year's, there is no COLA for the upcoming year. It's uncommon, but it has happened a few times.
How should retirees take the current COLA projection?
One downside of the COLA is that it's retroactive instead of proactive. The COLA is based on past inflation, not the current inflation that retirees are facing. For example, the 2026 COLA was 2.8%, which was respectable, but it doesn't help very much with current inflation.
In the July inflation report, the CPI-W was up 3.4% year over year, driven by the costs of gasoline (up 24.6%), electricity (up 4.2%), food (up 3%), rent (up 2.9%), and a handful of other essentials.
Much of current inflation has outpaced the 2.8% boost retirees received at the beginning of the year. So while inflation has cooled slightly in recent months, we're also seeing a loss in purchasing power in Social Security benefits. Retirees appreciate any COLA, for sure, but most would also prefer to at least maintain their purchasing power.
Right now, however, it's important to remember that TSCL's COLA projection is nothing more than a projection. It can help retirees begin to financially prepare for next year, but nothing is set in stone until the official number is released on Oct. 14.
