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The Social Security Cost of Living Adjustment is critical to helping retirees remain financially secure, or at least as close to financially secure as possible. The COLA causes Social Security benefits to increase over time to help ensure that retirement benefits keep pace with inflation. A larger COLA means that retirees get a bigger raise.
Retirees received a 2.8% COLA for 2026, which took effect in January, so seniors have seen more money in their checks this year. There’s also likely going to be a Cost of Living Adjustment in 2027. In fact, early evidence suggests that it’s probably going to be higher next year than this year. And, the reason why that’s the case is pretty troubling.
Why retirees are on track for a larger 2027 COLA — and why that’s not good news
In February, government inflation reports were released that resulted in the COLA forecast being pushed higher than originally anticipated. Mary Johnson, an independent Social Security and Medicare analyst, had initially projected that seniors would be on track for a 1.2% cost of living adjustment next year, but she adjusted that number upward to 1.7% following the inflation data.
The reason for the change: Concern about elevated oil prices.
The February data showed a 2.4% 12-month inflation rate. However, the CPI numbers also showed that the price of gasoline had fallen 5.6% over the prior 12 months. It was already showing inflation above the Federal Reserve’s 2% rate target, even though it did not reflect recent oil shocks that sent gas prices surging as a result of the military activity in Iran.
March data is expected to show prices rising as the cost of oil affects virtually every product we buy, from food to clothing to electronics and toys, because these items travel to use by truck, train, ship, or plane — all of which rely on gas and oil to get where they are going
The expected increase in oil prices prompted Johnson to adjust her COLA forecast, as she explained in an emailed statement to CNBC, which said, “Geo/political tensions are driving up the price of oil right now, which will continue to drive up my estimates of the COLA.”
A higher COLA isn’t good news for retirees
Retirees may be happy to hear that they are on track for a higher 2027 raise, but they shouldn’t be. While Social Security COLAs do result in a larger Social Security check, it is larger not to give retirees more buying power, but because the COLA is directly calculated to increase benefits based on year-over-year price increases.
This means that when the COLA forecast projects a higher benefit is coming, that happens because of expectations that inflation will be higher. Retirees will be impacted financially by that higher inflation as they’ll need to pay higher prices for everything that they buy. Unfortunately, money in their 401(k) and IRA doesn’t come with automatic inflation adjustments, and that money may be invested relatively conservatively given their age and risk tolerance. It’s very likely that many seniors will end up losing buying power on their savings due to inflation.
Retirees need to prepare for the fact that a higher COLA may be coming — but will come at a steep price if it results from high oil prices and geopolitical uncertainty driving up costs.