If Social Security is a big source of retirement income for you, you may be hoping for a larger cost-of-living adjustment, or COLA, in 2027 than what came through this year. January’s 2.8% left a lot of seniors struggling to make ends meet.
Following the release of April’s Consumer Price Index, the nonpartisan Senior Citizens League projected that Social Security recipients could be looking at a 3.9% COLA in 2027. That increased projection was spurred by a notable uptick in inflation.
For the millions of retirees who depend on Social Security, a 3.9% COLA could be huge. Based on the Social Security Administration’s intermediate-cost projections for benefit payments in 2027, a 3.9% COLA could amount to roughly $68 billion in additional benefits compared to a scenario where Social Security gets no COLA at all.
But for a 3.9% COLA to become reality in 2027, inflation needs to remain elevated. And following the most recent jobs report, that’s not a given outcome.
A large COLA depends on higher inflation
For many seniors on Social Security, a larger COLA in 2027 would be a game changer.
AARP’s 2026 Financial Security Trends Survey released in late May found that 37% of retirees feel financially insecure. So a large Social Security COLA could improve a lot of people’s outlook in the new year.
But Social Security COLAs are tied directly to inflation — specifically, the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The Social Security Administration compares third quarter CPI-W readings year over year to determine whether benefits are due for an increase.
For a 3.9% COLA to arrive in 2027, inflation will have to remain elevated for the duration of July, August, and September. And while that’s possible, it’s not guaranteed.
It’s also not necessarily a positive outcome.
Sure, seniors on Social Security would like to see their monthly checks increase a lot in the new year. But a 3.9% COLA will come at the cost of sustained inflation, which could put a lot of strain on retirees’ finances in the near term.
The latest jobs report changes the equation
Elevated inflation doesn’t just impact Social Security COLAs. It also influences the Federal Reserve’s monetary policy decisions.
When inflation is elevated, the Fed can raise interest rates to slow consumer spending. That’s what the Fed was forced to do in the years following the pandemic.
May’s jobs report, meanwhile, showed that the U.S. labor market is going strong. An estimated 172,000 jobs were added to the economy last month.
A solid jobs report like that means the Fed can’t lean on weak employment gains to avoid raising interest rates. But if the Fed does raise interest rates, it could lead to a slowdown in consumer spending. That could result in lower levels of inflation and — wait for it — a Social Security COLA in 2027 that comes in well below that 3.9% projection.
A 2027 COLA is still likely, but it may be smaller
There have been years in the past when Social Security benefits got no COLA at all. That’s unlikely to be the case in 2027.
Inflation is notably elevated. And even with a modest slowdown in consumer spending, there will likely be an increase in the CPI-W year over year during the third quarter. But it won’t be surprising to see next year’s Social Security COLA arrive in the 2% range, especially if the Fed does end up raising rates.
Now one thing worth noting is that the Fed is not likely to raise interest rates at its upcoming June meeting. A more likely scenario is a rate hike later in the year.
Of course, there’s been pressure on the Fed to lower interest rates this year. But current inflation readings make rate cuts unlikely for 2027 at this point.
A smaller COLA isn’t all bad
At first, a smaller Social Security COLA might seem like a blow for seniors. But it’s important to acknowledge the tradeoff.
A smaller COLA means lower inflation across the broad economy. What seniors lose in the form of a less generous raise, they could gain in the form of lower prices on key goods and services.
A moderate 2027 COLA should not be construed as a loss for seniors. And those who temper their expectations may be better equipped to deal with one if inflation reverses course.
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