Social Security's 2027 COLA Could Be the Biggest Since 2023

A growing number of retirees are highly dependent on Social Security to make ends meet. The most recent iteration of a Gallup annual poll found 62% of retirees say Social Security is a major source of revenue, the highest level recorded in the poll's 25-year history. As such, the annual cost-of-living adjustment (COLA) is of great importance to retirees, as it helps beneficiaries keep up with rising prices.

The good news is 2027 could see the highest annual COLA since the start of 2023, when beneficiaries received a giant 8.7% boost to their monthly payments. While retirees might not receive quite as big a boost as they did four years ago, it could be larger than each of the three previous years and the third-largest since 2009.

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How big could the 2027 COLA be?

The annual cost-of-living adjustment is based on a measure of inflation known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The CPI-W uses the same data collected for the more commonly reported CPI-U (CPI for All Urban Consumers), but the weightings on each item are slightly different. That leads to slight variations in the numbers.

The CPI-W rose 3.9% year over year in April, as the ongoing war in Iran drove oil prices higher. Not only did that affect gasoline and energy costs, but higher fuel costs and constrained commodity supplies also led to higher prices for just about everything.

But if retirees are hoping for the current level of inflation to be reflected in next year's COLA, it'll have to stay high through the summer. That's because the annual COLA is calculated by averaging the year-over-year CPI-W increases throughout the third quarter (July through September).

To that end, most experts expect inflation to remain elevated for the near future. The Federal Reserve Bank of Cleveland's May inflation forecast expects the CPI-U to climb 4.2% year over year. The CPI-W should look similar. What's more, the bank's quarterly survey of executives shows business leaders expect inflation to average 3.7% over the next 12 months. And the longer the war in Iran goes on, the worse inflation will get. A study from the Federal Reserve Bank of Dallas found that the longer the Strait of Hormuz remains blocked, the higher oil prices will climb, which will have a knock-on effect on overall inflation rates.

All of that led multiple analysts to forecast a significant jump in next year's COLA. Analysts at the Senior Citizens League now expect the 2027 COLA to come in at 3.9%. That's up from their prior forecast of 2.8%. Likewise, independent analyst Mary Johnson is now projecting a 4.2% COLA for next year. That's up from her prior expectations of 3.2%.

The double-edged sword of Social Security COLAs

While seniors may be in line to receive a significant boost to their monthly Social Security payments next year, they're still dealing with higher prices right now. And the inflation rate around 4% far exceeds the 2.8% COLA most beneficiaries received at the start of the year.

Almost every line item in the latest CPI report exceeds that level, suggesting seniors are seeing their buying power decline. Prices for shelter, medical services, and food, three of the biggest budget items for seniors, all increased about 3.2% year over year. Things are worse for seniors who eat out more than they cook at home, but the price of groceries spiked last month as well, putting a strain on food budgets.

As mentioned, the strain on seniors' budgets is likely even worse this month and may continue to increase throughout the summer. With no relief coming until January, many retirees will need to find ways to cut back on their spending in some categories as prices rise for their essentials.

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