Retirees Could See the Biggest Social Security Raise in 4 Years. Here's What Drives It.
Key Points
Social Security increases its benefits payments nearly every year.
The amount of this increase, however, is based on another agency’s measure of the nation’s economic situation.
As painful as they may be, at the beginning of next year, some Americans will receive some meaningful help dealing with recent price increases.
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Soaring inflation is making everyone miserable these days. But there is one upside to the price hikes: It should facilitate a sizable cost-of-living adjustment (COLA) for Social Security beneficiaries at the beginning of next year.
A very specific number, determined by a different branch of government
Contrary to a common belief, the annual increases in Social Security's monthly payments aren't arbitrarily pulled out of a hat or based on what the program's administrators feel is an affordable raise for any given year. These payment improvements are actually based on the nation's consumer inflation rates, as officially determined by the U.S. Bureau of Labor Statistics.
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And it's not just the number for a full calendar year. To ensure these adjustments are indicative of conditions at the time before going into effect in January, the Social Security Administration uses the average annualized consumer inflation rate for the three months of the third quarter of the calendar year. Last year, that number was 2.8%, translating into about a $56 improvement in the average monthly payment.
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The United States is on track for a year of above-average inflation. In April, the annualized rate of overall consumer inflation reached nearly a three-year high of 3.8%. If nothing changes between now and then, 2027's Social Security COLA, announced after the third quarter for the beginning of 2027, will be in this ballpark, marking the biggest increase since the 8.7% increase that took effect in 2023.
This will roughly be 2027's COLA (for what it's worth)
Sure, things could change between now and then. Recent price increases could be reeled in.
Realistically speaking, however, a significant unwinding of the inflation we're currently experiencing seems unlikely. The recent numbers should align with the cost-of-living adjustment that will be announced in October.
Just remember, this impending raise will only offset this year's higher prices. It won't leave more inflation-adjusted money in beneficiaries' pockets. Also, you're already out of pocket for the price increases that the upcoming COLA is meant to offset.
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