Your 2027 Social Security Raise Is Smaller Than It Looks. Here Are 4 Ways to Protect Your Buying Power

Earlier this month, the Social Security Administration announced that benefits will increase by 3.6% in 2027, thanks to the annual cost-of-living adjustment, or COLA. That's the largest adjustment since 2023, and it is a significant increase from the 2.8% raise Social Security beneficiaries got this year.

Unfortunately, the Bureau of Labor Statistics reported that consumer prices have risen by 3.7% over the past 12 months, including a staggering 34% jump in gasoline prices. Not only that, but Medicare premiums will likely take a bite out of retirees' Social Security increase. Here's why the Social Security COLA is often playing catch-up and what you can do about it.

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Why the COLA is (almost) always a step behind

If you aren't familiar with how it's calculated, the Social Security COLA is based on inflation in the third quarter. It looks at CPI data for July, August, and September and compares it with the same period a year ago.

In other words, the COLA is based on inflation that has already happened. The raise you get in January reflects last summer's prices, and not the prices you'll pay for goods and services next year.

What does the 2027 COLA mean to the average Social Security recipient?

The average retired worker receives $2,095 per month from Social Security as of the latest data, and a 3.6% increase would raise this to $2,170 per month, an increase of $75 per month ($900 per year).

However, Medicare has yet to announce the 2027 Part B premiums, and according to the latest trustees' report, they are expected to rise from $202.90 to $209.50 next year. Most Medicare beneficiaries pay these directly from their Social Security checks, so this would make the actual increase closer to $68 per month for the average retired worker.

4 smart moves you can make now

1. Budget for your actual increase

Plan your 2027 spending around the amount of money that will actually hit your bank account after Medicare premiums are deducted, not the 3.6% headline COLA. In early December, you'll be able to see your new monthly payment amount in your My Social Security account (at www.ssa.gov).

2. Compare Medicare costs

Open enrollment for Medicare runs from Oct. 15 through Dec. 7, and Part D and Medicare Advantage plans change costs and coverage every year. An hour or so spent comparing plans could result in more savings than you'd expect.

3. If you haven't claimed yet, consider waiting

Your Social Security benefit grows by 8% for every year you wait beyond full retirement age, up to age 70, and COLAs apply to your benefit even before you claim. If you can afford to wait, doing so can be one of the best inflation-protected investments available.

4. Protect the rest of your income

Social Security is designed to be just one piece of a retiree's income. One of the silver linings of being in a high-inflation environment is that it can be a great time to lock in some low-risk yield. The 10-year Treasury yield is about 5% as of this writing, and there are inflation-protected Treasuries (TIPS) available, just to name a couple of examples.

The bottom line

As a final thought, the Social Security COLA isn't a perfect way to track retirees' costs. It relies on the CPI-W, which tracks the spending patterns of urban wage earners, who have different expense makeups than most retirees. For example, the typical retiree spends a larger share of their budget on healthcare and housing than the average worker. There's a separate inflation index designed to track expenses for retirees, called the CPI-E, but it hasn't been adopted yet.

To be clear, a 3.6% COLA is certainly meaningful and should help retirees' purchasing power. But it's unlikely to fully keep up with rising costs, especially at a time when inflation is trending higher. But by taking some of the steps discussed here, you may help close the gap.

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