Social Security's Upcoming COLA Has a Flaw That Costs Seniors Every Year
Key Points
Current estimates are calling for a larger Social Security COLA in 2027 than the raise that came through this year.
Even if that ends up happening, that COLA may not actually keep up with real-world costs for seniors.
Changing the COLA formula could help Social Security benefits avoid losing buying power.
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There's a key number Social Security recipients have been tracking for months: the upcoming cost-of-living adjustment, or COLA. The purpose of COLAs is to help Social Security benefits keep pace with inflation over time. But they often fail to do so in practice.
There's a reason Social Security COLAs have long let seniors down -- and why the 2027 COLA may lead to a repeat dose of disappointment.
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The Social Security COLA formula is flawed
The Senior Citizens League, an advocacy group, reports that Social Security benefits have lost an astounding 13.7% of their buying power over the past 10 years. And the reason largely boils down to COLAs not keeping up with real-world cost increases.
When we dig into how COLAs are calculated, it's easy to see why.
Social Security COLAs are based on third-quarter changes each year to the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. But the CPI-W is a poor measure for Social Security COLAs because it tracks the spending habits of younger, working-age employees rather than those of older, retired adults.
Most people who get Social Security are retired and aren't working (though it's possible to work while receiving those monthly checks). But older adults tend to spend more money on medical care than younger workers do.
Healthcare isn't a highly weighted cost in the CPI-W. But it also tends to outpace broad inflation. For this reason, the CPI-W often fails to capture the real cost increases seniors experience, causing Social Security benefits to lose buying power even during periods when COLAs are fairly generous.
Given this general flaw, there's a good chance the 2027 COLA won't really help seniors on Social Security keep up with rising costs. A generous raise might help a little. But unless there's a change to the COLA formula, seniors could continue to lose out.
Other COLA options exist, but lawmakers aren't budging
The CPI-W isn't the only option for calculating Social Security COLAs. For years, advocates have pushed to base those COLAs on the Consumer Price Index for the Elderly, or CPI-E.
The reason there's been pushback is likely twofold. First, the CPI-E is considered experimental, so the argument can be made that there's too much at stake to use it as the basis for COLAs.
The other issue is that Social Security is facing a major funding shortfall that could result in benefit cuts. If the COLA formula is adjusted to allow larger increases, it could further strain the program's finances.
As such, there's been hesitation to change how COLAs are calculated, which means seniors should keep their expectations in check regarding their upcoming raise.
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