Big or Small? Why the 2027 Social Security COLA Could Surprise Retirees.

There's a reason Social Security tends to make the news a lot during the month of October. That's when the program typically announces its annual cost-of-living adjustment, or COLA.

Social Security benefits are eligible for a COLA each year that's tied to inflation. The purpose of COLAs is to help ensure that recipients are able to maintain their buying power over time.

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Even though it's only May, a lot of seniors are curious as to what next year's Social Security COLA will amount to. And while it's too soon to know, early signals suggest that 2027's COLA could be a lot larger -- or smaller -- than 2026's.

Why the upcoming COLA is so uncertain

Social Security COLAs are based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers. Inflation readings from earlier in the year can sometimes be predictive of movement in prices during the months of July, August, and September. But that's not always the case.

In March, inflation rose substantially in the wake of the Iran conflict. Higher oil prices drove up gas and energy costs, which then shifted prices upward across a range of consumer categories, from food to apparel.

If these higher prices persist, seniors on Social Security could be in for a pretty significant COLA in 2027. But if the conflict overseas settles down and oil prices fall rapidly in the coming months, next year's COLA could end up being comparable to or even lower than this year's raise.

What the experts say so far

Following March's CPI-W release, the Senior Citizens League, an advocacy group, estimated next year's Social Security COLA at 2.8% -- the exact same raise as in 2026. But Mary Johnson, an independent Social Security and Medicare policy analyst, said in April that she expects a 3.2% COLA in 2027 due to sharply rising gas prices.

Of course, the frustrating thing is that it's too soon to know what next year's COLA will amount to, which can make financial planning tricky. Seniors can continue to track inflation data and expert projections to try to narrow that number down. But until third quarter inflation data starts to come in, it can be pretty difficult to get a good handle on that number.

That said, Social Security COLAs tend to trail inflation even though they're designed to keep up with it. The reality is that even if a given COLA holds up to inflation broadly, Social Security recipients tend to spend a lot of their income on healthcare, which commonly rises at a higher rate than inflation.

It's also important to recognize that a larger Social Security COLA in 2027 isn't automatically a good thing. That's because what seniors gain in the form of larger monthly checks, they're apt to lose in the form of higher living costs.

On the flipside, a smaller COLA isn't necessarily terrible. If anything, it will be a clear indication of slowing inflation and more affordable expenses on a whole.

It pays to be proactive

At this stage of the year, it's not worth getting too hung up over whether next year's Social Security COLA will come in at 2.8%, 3.2%, or a completely different number. And to be clear, it's possible that next year's raise will be well below 2.8% if inflation cools significantly, even if the experts aren't saying that right now.

So a better use of seniors' time is to review spending and find ways to make cuts if money is tight. Working in some capacity could also have a much larger impact than a Social Security COLA, even if the upcoming raise is the most generous one to arrive in years.

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