Social Security's COLA for 2027 Is Shaping Up to Be Historically Unique in a Key Way -- But Several Problems Loom

Anyone on Social Security is likely keenly interested in the program's nearly annual cost of living adjustments (COLAs) -- and in what the upcoming one will be. The formal announcement is due in mid-October, but until then there has been a lot of speculation, with estimates rising and falling.

For example, the folks at AARP recently upped their estimate for the 2027 cost-of-living adjustment (COLA) from 3.5% to 3.6%. Meanwhile, the Senior Citizens League lowered its projection from 3.6% to 3.5%. Those are different estimates, but they're clearly not far apart. More interesting is the fact that the 2027 COLA, which will be announced in 2026, is likely to be of historical note.

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Recent COLA history

To set the stage, here are recent COLAs:

Data source: Social Security Administration.

The historical average COLA increase is around 2.6% -- but looking at the table above, you'll see that most of the recent COLAs have been well above that. Indeed, the upcoming 2027 COLA is looking like it will be the sixth year in a row of increases of 2.5% or higher.

That's not reflecting generosity on the part of the Social Security Administration. Instead, it simply reflects higher inflation in recent years.

Suboptimal increases

Social Security's COLAs are obviously meant to help retirees keep up with inflation. Without them, a monthly benefit of, say, $2,000, which buys $2,000 worth of goods and services today, may only have the purchasing power of $1,000 -- or less! -- in 25 years. That's a scary prospect for anyone -- especially those who depend heavily on Social Security benefits to cover living expenses.

There's a problem, though: The COLA calculations are based on one measure of inflation instead of a more appropriate one. Specifically, the increases are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- a measure that's focused on common spending patterns for workers, not retirees. It would make a lot more sense to base increases on the Consumer Price Index for the Elderly (CPI-E), which weighs categories such as healthcare more heavily. After all, healthcare spending in retirement can be a major expense.

Even with suboptimal increases, though, retirees are getting regular bumps that will help their incomes keep up with inflation. So hooray for that!

A shrinking surplus

There's another problem, though. For many years, Social Security took in more in taxes from workers than it paid out to retirees, so it ran a surplus. Times have changed, though, and in part due to people living longer and often retiring earlier, the surplus has been shrinking.

If nothing is done to strengthen it, Social Security's trust funds' surplus will run out within a few years, which will result in benefits shrinking to around 78% of the amount due to beneficiaries. That would turn a $2,000 benefit into a $1,560 one. Yikes!

Fortunately, there are multiple ways to fix Social Security. For example, there's an earnings cap, which for 2026 is $184,500. So someone who earns $33,184,500 pays as much into Social Security as someone who earns $184,500. If we fully taxed everyone's earnings, or at least if the cap was raised significantly, Social Security's coffers would greatly benefit.

A new concern: Possible smaller COLAs

Here's one more problem -- a possible one: There's a new proposal, floated by the Committee for a Responsible Federal Budget (CRFB), to have a flat-rate COLA for Social Security.

Here's how they suggest it would work: Instead of coming up with a percentage increase that's applied to each of our benefits, giving everyone the same percentage bump, they recommend coming up with the annual increase percentage, but then applying it to the benefit received by someone at the 20th percentile (i.e., someone whose benefits are smaller than 80% of beneficiaries). So lots of low-income retirees would receive the same degree of increase that they'd receive with today's system -- or potentially a bigger increase. But 80% of beneficiaries would be getting a smaller increase, the same increase that those with much lower benefits receive.

This is suggested as a way to strengthen Social Security and to make its surplus last longer. But it's doing so by shrinking many retirees' precious benefits -- ones they've earned over a lifetime of taxes on their earnings. To me, this does not seem like a great idea at all.

The bottom line is that we can count on a Social Security COLA to be announced next month, and it's likely to be around 3.5%, give or take a little. But Social Security's future health is threatened, and Congress needs to enact some fixes before our benefits shrink instead of growing.

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