Here's How Social Security's 2027 COLA Stacks Up Against Past COLAs

Inflation affects us all, but it can be especially challenging for the millions who rely on Social Security for their retirement income. That’s why Social Security has an annual cost-of-living adjustment (COLA), which is intended to help keep pace with inflation and maintain retirees’ purchasing power.

On Oct. 14, the COLA for 2027 was officially set at 3.6%. It’s the largest COLA since the 8.7% bump in 2023, but how does it compare to the past few decades? Let’s take a look.

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How the 2027 COLA compares to other years

The 3.6% COLA for 2027 is one of the highest since it became automatic in 1975. Here are the past 30 COLAs:

Data source: Social Security Administration.

How the COLA is set each year

The COLA is set based on an inflation measure called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Instead of the Social Security Administration (SSA) setting the COLA at its discretion, it uses changes in the CPI-W from the third quarter (Q3) of each year to calculate it automatically.

The Q3 CPI-W average from the current year is compared to the previous year’s average, and the COLA is set as the percentage increase. For example, this year’s average was 328.746, while last year’s average was 317.265. This 3.62% jump landed us at 2027’s 3.6% COLA.

In years when the CPI-W may have decreased from the previous year, there’s no COLA for the upcoming year. Benefits will never be reduced in this situation, however. It’s uncommon, but it has happened in 2010, 2011, and 2016.

Two sides of the COLA coin

On one hand, Social Security recipients will take as much of a benefits bump as they can get. After all, who doesn’t want more money, right? The issue is that a high COLA also means inflation has been high. If you’ve recently gone to a gas station, grocery store, or retail store, you’re probably well aware of that.

Retirees are currently facing high inflation, but the high 2027 COLA doesn’t kick in until January. This disconnect, along with a jump in more senior-related expenses like healthcare, has left a situation where, even with COLAs, Social Security benefits have consistently lost purchasing power over the years.

One organization, The Senior Citizens League, estimates that even in the past decade, Social Security benefits have lost nearly 14% of their purchasing power.

Obviously, this isn’t ideal, but there are no immediate signs of a fix being put in place. In the meantime, Social Security recipients should plan accordingly and expect the bump to fall a bit short of the actual inflation they may be facing.

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Here’s How Social Security’s 2027 COLA Stacks Up Against Past COLAs was originally published by The Motley Fool