A Bigger 2027 Social Security COLA Could Have This Dire Consequence

Even if you plan well for retirement, there’s a sneaky factor that could drive your costs up over time — inflation.

Thankfully, Social Security benefits are protected from inflation. Each year, benefits are eligible for an automatic cost-of-living adjustment, or COLA.

This past January, Social Security benefits got a 2.8% COLA. But many seniors are hoping next year’s raise will be larger. And if inflation continues to remain elevated, there’s a good chance they’ll get their way.

But a larger Social Security COLA in 2027 could have massive consequences. And ultimately, seniors could end up losing out.

Why a larger Social Security COLA could be a problem

There are actually two reasons why a larger 2027 COLA may not be something to celebrate. The first relates to inflation directly.

COLAs and inflation go hand in hand. When benefits get a big increase, it comes at the expense of higher costs across a range of consumer goods.

Social Security recipients might enjoy seeing their paychecks go up from year to year. But if there’s a big increase in 2027, it will mean that inflation remained elevated through the summer, which could burden seniors who don’t have much income outside of those monthly benefits.

The bigger issue, however, relates to Social Security’s finances on a whole.

Social Security is at risk of having to cut benefits broadly in a matter of years. The problem is that the program is expected to owe more in benefits than it collects in revenue, and that once its trust funds are emptied, cuts may be the only solution for bridging that gap.

If Social Security benefits become eligible for a large COLA in 2027, that could further strain the system, making benefit cuts even more likely.

Remember, an increase in inflation does not lead to more revenue for Social Security. The program is funded primarily by payroll taxes. The fact that consumers have to spend more money doesn’t benefit Social Security. And if the program is forced to raise benefits substantially in the new year because inflation data says so, it could get pushed that much closer to insolvency.

Social Security recipients need to brace for benefit cuts

Social Security cuts are not expected to happen within the next couple of years. But they could easily happen within the next six to seven years if lawmakers don’t manage to come up with a way to prevent them. So the time to prepare for those cuts is now.

If you’re still working, boost your savings rate. If you’re putting 7% of your salary into your 401(k), immediately cut a few expenses to make it 8%. Then make it 9% next year. And so forth.

If you’re already retired, it may not be too late to go back to work and use your earnings to build savings. If that’s not possible, try your best to trim expenses. These strategies are useful even if Social Security doesn’t end up having to cut benefits, because the reality is that a larger COLA in 2027, or at any given point in time, may not be enough to cover all of your expenses.