The 2027 Social Security cost-of-living adjustment, or COLA, could outpace inflation and boost Baby Boomers’ spending power next year.
If inflation cools next year as economists predict, the COLA could feel like a raise to beneficiaries, a new Bank of America Institute report said.
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The Social Security Administration announced on Oct. 14 that the COLA will be 3.6%, the largest increase since 2023. It is set to take effect in January for most recipients, giving a $75 average bump to monthly retirement benefits.
The question beneficiaries are asking: Will it be enough? Advocacy groups such as the Senior Citizens League say firmly that the answer is no.
“A 3.6% COLA is not enough!” John Adams, the organization’s chairman, said in an email blast Tuesday, adding that it won’t cover “the rising cost of everyday essentials.”
As measured by the consumer price index for urban wage earners and clerical workers, or the CPI-W, the annual inflation rate is 3.9%, several notches higher than the 2027 COLA.
How the COLA compares with projected inflation
Comparing the COLA with current inflation isn’t the only way to assess the increase. The Bank of America Institute explains in the report that there’s historically a connection between the COLA and retirees’ spending in the year it takes effect.
The Social Security COLA is a routine cost-of-living increase mandated by federal law. It’s supposed to ensure that benefits rise in tandem with prices. It usually doesn’t make or break retirees’ finances. “But when inflation is close to a turning point, the increase can end up looking relatively high or low compared with inflation over the course of the following year,” David Tinsley, senior economist at the Bank of America Institute, wrote in the report.
The COLA is calculated by comparing average CPI-W inflation in the third quarter of the year with inflation in the third quarter of the previous year.
Retirees’ benefits would rise faster than prices if the COLA beats inflation, giving some older Americans a bit of breathing room in their budgets.
Looking at the 2023 COLA as the most recent example, Bank of America observed a link between the 8.7% adjustment, which far outpaced inflation that year, and slow spending growth among Baby Boomers and the Silent Generation.
The report says 2027 could be a mini-repeat of 2023. “The consensus expectation is that CPI inflation is likely to cool over 2027, largely reflecting the lessening impact of higher gasoline prices,” Tinsley wrote.
In that case, benefits would rise more than prices in 2027. But near-term inflation is difficult to predict, and the shocks to energy prices are ongoing.
Tinsley’s report highlights the unique mix of income streams among Americans 60 and older, who may be collecting pensions and Social Security, and who typically receive more income from interest, dividends and rental properties than younger generations.
Low unemployment rates and wage growth have been primary drivers of economic gains for workers. However, that doesn’t mean much for people who have retired.
Bank of America’s data shows that older generations’ discretionary spending growth has lagged younger generations’ for roughly a year. It’s another reason the COLA can’t come soon enough for tens of millions of Social Security beneficiaries.
The bottom line: “If these [inflation] expectations prove correct, households that rely on Social Security may receive a more impactful boost to their budgets next year than they have for the last few,” Tinsley wrote.
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