3 Must-Know COLA Facts Before the Big Announcement
Key Points
COLAs may not be doing their job of maintaining purchasing power.
You won't necessarily get to keep your full COLA.
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The Social Security cost-of-living adjustment (COLA) is expected to be announced on Oct. 14, giving beneficiaries critical information about their 2027 benefits. Here are some key facts to know about the COLA ahead of the announcement so you can better understand what this benefit bump will do for you.
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1. COLAs are an inflation adjustment, not a raise
One of the most important things to know is that while the Social Security cost-of-living adjustment (COLA) will cause your benefits to increase, it is not really a raise.
COLAs help retirees avoid losing buying power due to the effects of inflation. As prices rise over time, you get more money in your Social Security check. The increase is directly based on year-over-year price increases in the third quarter of the previous year, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
In other words, the only goal is to help you pay for the same things you bought before, which now cost more. Don't assume you have more buying power or that your benefits will go further just because you start receiving a larger deposit in your account from Uncle Sam.
2. COLAs aren't doing a very good job of keeping pace with inflation
It's also critical that you realize your Social Security benefits increase may not perfectly do its job of helping you to avoid lost buying power. In fact, data from the Senior Citizens League suggests COLAs aren't doing their job well at all, with benefits losing 20% of their buying power between 2010 and 2024.
COLAs are unfortunately not as accurate as they should be in identifying the inflation that retirees are experiencing because they are calculated using CPI-W, which measures price changes based on a basket of goods and services that's not well-aligned with what older Americans actually spend money on.
By underweighting how much of a retiree's income typically goes to things like healthcare and housing (two areas where inflation has been especially strong), the CPI-W changes don't accurately reflect the price increases most retirees cope with.
3. You may not get to keep the entire COLA bump
Finally, you should be aware that you won't always get to keep the entire COLA amount.
If your benefits increase by 3.6%, for example, your monthly deposit into your account won't necessarily go up by the full amount. For example, if you are having Medicare premiums withdrawn from your Social Security check, which many seniors do, and premiums increase, the extra money you're spending on Medicare comes out before it hits your account.
It's important to realize these things when doing your retirement planning for the upcoming year so that you'll be more aware of how far your dollars can stretch.
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