Social Security Retirees Aren't Getting a Real Raise in 2027, No Matter What the COLA Numbers Say

In 2027, retirees who receive Social Security will get more money in their benefit checks. That's because Social Security cost-of-living adjustments (COLAs) are a part of the program and happen automatically.

The COLA is often called a raise, because that's the term people use when their annual income increases. However, it's important that retirees realize they are not getting a real raise in 2027, and they essentially never will get a real raise from Social Security. Here's why.

Image source: Getty Images.

The COLA isn't a raise, and retirees shouldn't treat it like one

The reality is that a Social Security COLA is not a raise. Instead, it adjusts benefits to account for inflation. In fact, it is calculated from year-over-year changes to the price of a basket of goods and services that make up the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

When CPI-W shows prices in the third quarter have increased, the COLA is adjusted accordingly. For example, if the average CPI-W data for the third quarter of the year (the period used to calculate benefits) shows costs rose by 3.6%, retirees would see their Social Security checks increase by 3.6%. The AARP is currently projecting that the 2027 COLA will come in at that amount.

But retirees won't get 3.6% more buying power if this happens. They can't go out and buy more things. The COLA just keeps them from losing ground. Their standard of living doesn't increase because of these benefit bumps, and it isn't meant to.

COLAs may be underestimating the inflation retirees actually experience

There's also a bigger problem beyond just a misunderstanding of whether COLA is a raise or an inflation adjustment. The reality is that COLAs aren't even doing a very good job of helping seniors avoid losing buying power, despite that being their purpose.

Unfortunately, the COLA formula has an inherent flaw. The spending habits of retirees do not align with those of urban wage earners and clerical workers. And seniors tend to spend more of their money in categories that often see above-average inflation. For example, healthcare and housing prices are a major line item in most retirees' budgets, and the costs of both tend to rise faster than the overall inflation rate.

This problem with the COLA formula means retirees have lost an estimated 13.7% of their buying power since 2016 alone, according to the Senior Citizens League.

When your "raise" causes the buying power of your benefits to decline, that's not a real raise in any sense of the word. Retirees need to understand this reality when making their retirement plans so they don't overestimate what Social Security will do for them and ensure they have sufficient supplemental income for the comfortable retirement they deserve.

The Motley Fool has a disclosure policy.