The Social Security Administration Has Spoken: Here's the 2027 Cost-of-Living Adjustment (COLA) -- and What It Will Do to Your Benefit

After many months of speculation regarding what the cost-of-living adjustment (COLA) will be for Social Security benefits for 2027, we have the final word, not just some educated guesses. The Social Security Administration has just announced (on Oct. 14) that the next increase will be 3.6%.

Here's a look at what kind of increase it is, historically, and how it may affect your benefit.

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The Social Security COLA in historical context

Here are the COLAs for some recent years:

Data source: Social Security Administration.

The 3.6% hike is clearly the highest one since the one announced in 2022, which was exceptionally high, at 8.7%. It's tied for the fifth-largest Social Security COLA over the last 35 years -- but it's also not far from the long-term average COLA, which, per pennycalc.com, is 3.7%. (That number skews a bit high due to double-digit inflation in the 1970s and early 1980s. The 1980 hike, for example, was 14.3%!)

How will this latest COLA boost benefits?

Per the SSA, the average recipient will get a $75 monthly increase -- or $900 for the year. (The average monthly retirement benefit was $2,088, as of August.) Here's what a 3.6% increase will do to benefits of different sizes:

Calculations by author.

Calculations by author.

Is 3.6% enough?

For most folks, a 3.6% increase will not be sufficient to completely protect them from inflation's bite. That's in large part due to the fact that COLAs are not based on the best measure of inflation for seniors. Social Security bases its COLAs on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is an index based on changes in the average prices of household goods such as food, housing, and transportation, but it's focused on the typical expenses of workers, not retirees.

It would make much more sense to base COLAs on the Consumer Price Index for the Elderly (CPI-E), which weighs categories such as healthcare expenses in retirement and housing more heavily. Those retirees spending a lot on, say, healthcare, are likely losing some purchasing power with their benefits. They may get annual Social Security benefit increases -- but those increases may not keep up with increases in their living expenses and medical care.

Meanwhile, remember that many retirees pay their Medicare premiums automatically, out of their Social Security benefits. It's been projected that the monthly Part B premium will rise about 3.25%, from $202.90 to $209.50. That $6.60 bump will take away from the overall COLA bump. Many stand-alone Part D prescription drug plans are likely to see an increase in costs, too.

Focus on the right number

A much bigger problem than just getting a 3.6% increase in your Social Security benefit is that all beneficiaries may be getting a big cut -- of around 22% -- if nothing is done to shore up Social Security. The program's surplus has been shrinking, as it's been paying out more than it has been taking in. Social Security's trust funds' surplus will run out within a few years, and benefits will likely shrink to around 78% of the amount due to beneficiaries. That would turn a $2,000 benefit into a $1,560 one -- and would wipe out any benefit from a COLA. (Fortunately, there are multiple ways to fix Social Security.)

So go ahead and be pleased about the new 3.6% increase in Social Security benefits. An increase means more money for beneficiaries. But keep that bump in context, too, and keep up with Social Security developments, because they are likely to have a big effect on your financial security in retirement.

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