Earlier this month, the Social Security Administration announced that retired workers and other beneficiaries will receive a 3.6% cost-of-living adjustment (COLA) in 2027. That is up from the 2.8% COLA in 2026.
However, there is even better news for Social Security recipients: The 2027 COLA theoretically represents an increase in purchasing power due to below-average inflation in housing and medical care prices.
Social Security benefits will increase 3.6% in 2027
Social Security beneficiaries receive annual cost-of-living adjustments (COLAs) to help them keep pace with rising prices. Inflation accelerated earlier this year when the U.S. went to war in Iran, sparking the largest oil supply disruption in history. That, in turn, pushed gasoline prices to their highest level in four years.
To offset higher prices across the economy, Social Security benefits will receive a 3.6% COLA in 2027. That is the largest pay increase for retired workers since an 8.7% COLA was awarded in 2023, and it’s well above the 20-year average of 2.9%.
The chart below shows how much the average monthly Social Security payment will increase next year for different types of beneficiaries.
|
Beneficiary Type |
Average Benefit (Before COLA) |
Average Benefit (After COLA) |
Change in Dollars |
|---|---|---|---|
|
Retired Workers |
$2,089 |
$2,164 |
$75 |
|
Spouses |
$987 |
$1,022 |
$36 |
|
Survivors |
$1,636 |
$1,695 |
$59 |
|
Disabled Workers |
$1,636 |
$1,695 |
$59 |
Source: The Social Security Administration.
As shown above, the average monthly retired-worker benefit will be about $2,164 in 2027. That means the average retired worker will receive an additional $75 per month or $900 for the full year.
Social Security’s 2027 COLA comes with a silver lining
Many policy analysts argue that Social Security’s COLAs are consistently insufficient because they are based on a subset of the Consumer Price Index known as the CPI-W, which measures price changes based on how working adults spend money. The problem with that method is that working adults generally spend money differently than retired workers on Social Security.
Most notably, retired workers tend to spend more on housing and medical care, while working adults tend to spend more on food and beverages, education, and transportation. As a result, the CPI-W underestimates the impact of price increases in housing and medical care, and it overestimates the impact of price increases in the other three categories.
For that reason, some experts believe Social Security’s COLAs should be based on another subset of the Consumer Price Index known as the CPI-E, which measures price increases based on how individuals aged 62 and older spend money. The CPI-E population overlaps more closely with the Social Security population, so it puts more weight on the spending categories that matter most to retired workers.
Over the last decade, the CPI-E has outpaced the CPI-W by approximately two-tenths of a percentage point per year. That arguably means Social Security’s COLAs have consistently been a little too small. But the opposite happened this year. The CPI-E increase 3.4% in the third quarter of 2026, below the 3.6% increase observed in the CPI-W because price increases in the housing and medical care categories were below average.
So what? If the CPI-E is truly a better measure of inflation for Social Security beneficiaries, then the 2027 COLA is larger than necessary. In other words, retired workers theoretically gained purchasing power. Of course, the CPI-E only topped the CPI-W by two-tenths of a percentage point, so the increase in purchasing power is modest. But it still represents an important change.
This is the first year in which the CPI-W has increased faster than the CPI-E since 2022. In other words, Social Security benefits have arguably lost purchasing power in each of the last three years. But the streak has finally ended, and that’s good news for retired workers on Social Security.
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Social Security Retirees Get a Big COLA in 2027, and It Comes With Even Better News was originally published by The Motley Fool
