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. Experts predicted a similar COLA to this year's, but the Iran war pushed energy prices higher, which trickled down throughout many as…
Intelligence analysis by Llama
The Social Security COLA is determined by inflation data from July through September. The recent June inflation data is bad news for retirees hoping for a 3.8% COLA next year, but there are a few silver linings, including a decline in energy prices and the goal of the COLA to maintain purchasing power.
Imagine you're a retiree who gets a Social Security check every month. The amount of money in that check might go up or down depending on how much things cost in the stores. If things cost more, you might get a bigger check to help you keep up. But if things cost less, you might get a smaller check. Recently, some bad news came out that might mean retirees get a smaller check next year. However, there are a few good things that might happen too.
Analysis
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 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.
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 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.
Key points
- The Social Security COLA is determined by inflation data from July through September.
- The recent June inflation data is bad news for retirees hoping for a 3.8% COLA next year.
- There are a few silver linings, including a decline in energy prices and the goal of the COLA to maintain purchasing power.
- A smaller 2027 COLA might be a positive outcome for retirees, but it also means they might get a smaller check.
- The higher cost of living eats into retirees' finances, which could lead to a decrease in purchasing power.
If the trend of declining energy prices continues, it could lead to a smaller 2027 COLA, which might be a positive outcome for retirees. Additionally, the goal of the COLA is to maintain purchasing power, and a smaller COLA might help achieve this goal.
If the trend of declining energy prices does not continue, it could lead to a larger 2027 COLA, which might be a negative outcome for retirees. Additionally, the higher cost of living eats into their finances, which could lead to a decrease in purchasing power.
