Social Security Retirees Just Got Bad News About the 2027 COLA, but There Is a Silver Lining

Social Security retirees are about to enter the most crucial part of the year when it comes to determining their benefit increase in 2027. At the start of the year, experts predicted that next year's cost-of-living adjustment (COLA) could be similar to this year's.

But everything changed when the Iran war started, pushing energy prices higher, which trickled down throughout many aspects of inflation. Recently, Social Security recipients received bad news about their 2027 COLA, but there is a silver lining.

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The bad news

The Social Security COLA is essentially determined by looking at inflation data from July through September. While the market pays close attention to the Consumer Price Index for All Urban Consumers (CPI-U), the COLA is determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That is a subset of the CPI-U and intended to better reflect prices for retirees, although there's much dispute about whether it actually achieves this.

Given this relationship, price movements in the CPI-W are strongly correlated with those in the CPI-U.

As I mentioned above, at the beginning of the year, inflation had dropped but remained stubbornly above the Federal Reserve's 2% target. This led groups such as the nonpartisan Senior Citizens League (SCL) to estimate the 2027 COLA at 2.8% at the beginning of the year, matching this year's figure.

But after the Iran war drove up energy prices, the SCL raised its estimate, more recently predicting the 2027 COLA to come in at 3.8%, although that estimate is likely to change following the June inflation data.

A 3.8% COLA would be the largest since 2022, when inflation hit a 40-year high. It would also be toward the larger end of COLAs seen in the 21st century.

To determine the COLA, the Social Security Administration looks at the average CPI-W for July, August, and September and compares it to the same number from the prior year. The percentage difference reflects the following year's COLA, which can never be negative.

The first important July CPI-W number used to calculate the COLA will be released in August. But June inflation data just came out, and it is bad news for those retirees hoping for a 3.8% COLA next year.

The June CPI-U came in at 3.5% year over year, but fell 0.4% seasonally adjusted from May. Core inflation, which strips out more-volatile food and energy prices, also declined from 2.9% in May to 2.6% in June.

If this trend continues through September, retirees could see a smaller 2027 COLA than had been expected in recent months.

US Consumer Price Index YoY, data by YCharts; YoY = year over year.

The silver linings

There are a few silver linings that retirees can glean from this recent data point.

First, it was heavily driven by a decline in energy prices. However, more recently, the war between the U.S. and Iran has re-escalated, pushing energy prices back up, so if this does last, then the CPI might rebound in July. The story of inflation is far from over, despite the June data.

The other silver lining is that having a higher COLA hits both ways. On the one hand, retirees enjoy increased benefits. On the other hand, the higher cost of living eats into their finances.

The ultimate goal of the COLA is to maintain purchasing power. However, it is well known that COLAs have not exactly accomplished that goal. In the nonpartisan SCL study published earlier this year, it found that between 2016 and 2026, Social Security benefits lost nearly 14% of their value.

So, the more inflation there is, you could at least suspect that -- under the current way of calculating COLAs -- the more purchasing power retirees claiming benefits could lose as inflation rises.

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