Social Security COLA 2027 could increase retirees’ monthly checks by $77 as experts push for formula change
U.S. Social Security retirees are expected to receive a 3.8% cost-of-living adjustment (COLA) by 2027, according to the latest forecast from COLA Watch, a coalition for seniors. If the forecast becomes official, the monthly average social security retirement Benefits will increase by about $77, from about $2,026 to $2,103.41 per month.
Despite the increase, retirees still earn about $597 less per month than the average monthly living expenses for senior Americans (about $2,700). The forecast has renewed calls from senior advocacy groups to change the way Social Security’s annual increases are calculated.
The Seniors Coalition urges Congress and the President of the United States to increase Social Security benefits so that older Americans can better afford basic living expenses. The group said lawmakers should also replace the current formula used to calculate annual COLA increases because it believes the current system doesn’t reflect retirees’ actual spending.
How is Social Security COLA calculated today?
Yahoo Finance explains that each year, Social Security benefits are adjusted through a cost-of-living adjustment (COLA), which helps benefits keep pace with inflation. The current COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) compiled by the U.S. Bureau of Labor Statistics (BLS). The CPI-W measures price changes for a fixed basket of goods and services, including food, housing, clothing, transportation and other daily expenses.
Each fall, the Social Security Administration compares average CPI-W readings in July, August and September to the same three months last year. If the CPI-W rises, Social Security benefits increase at the same rate starting in January of the following year. if inflation Social Security benefits don’t go up or prices go down, and Social Security benefits don’t go down – they just stay the same.
Why experts say current formulas aren’t enough
The Seniors Alliance wants the government to switch from CPI-W to another inflation measure, the Consumer Price Index for Elders (CPI-E). The CPI-E is an experimental measure introduced by the U.S. Bureau of Labor Statistics in 1987 to track inflation based on the spending habits of older Americans. Unlike the CPI-W, the CPI-E focuses on how retirees actually spend their money, not how working-class Americans spend their money.
The CPI-E uses the same price data collected by the government but gives different weight to spending categories based on retirees’ budgets. Housing costs, health care spending and other expenses more important to seniors carry greater weight in the CPI-E.
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Rich Johnson, vice president of financial security at the AARP Public Policy Institute, said the current system does not accurately reflect retiree spending. “COLA is sometimes considered insufficient because it does not reflect the spending patterns of Social Security beneficiaries,” Rich Johnson, vice president of financial security at the AARP Public Policy Institute, told Yahoo News.
Johnson explained that older Americans typically spend more than younger workers on housing and health care and less on transportation, food, drinks and clothing.
“For example, people aged 62 and over spend more on housing and health care and less on transport, food and drink, and clothing,” he added. “Social Security beneficiaries are 62 or older (except for some who receive disability benefits) and are older than most urban working-class and clerical workers.”
How CPI-E increases Social Security benefits
Because the CPI-E places more weight on categories like health care and housing, when those costs increase, it typically rises faster than the CPI-W. Johnson said CPI-E-based Coke has produced higher annual growth rates in most years over the past four decades.
AARP experts said: “If Social Security COLA were based on CPI-E instead of CPI-W, the COLA would be higher in every year except eight during the 40-year period from 1986 to 2025.”
Johnson noted that year-to-year differences between CPI-E and CPI-W are typically small, averaging about 0.2 percentage points, but these differences add up over the years. He said retirees who started receiving benefits in 1986 would have received much larger monthly payments by 2025 if CPI-E had been used.
According to Yahoo Finance, he added: “If the CPI-E-based COLA had gone into effect in 1986, Social Security benefits in 2025 would have been 8.1 percent higher than the actual COLA for that year for people who started receiving them in 1986.”
Why the government hasn’t moved to CPI-E
Although the CPI-E is nearly 40 years old, it is still officially considered an experimental index Bureau of Labor Statistics. Johnson said the experimental nature of the index is one of the main reasons it has not yet replaced the current formula. “One of the reasons the index has not been adopted is that it is considered experimental,” Johnson said via Yahoo News.
The CPI-E is based on a much smaller survey sample, about one-third the size of the CPI-W survey, which may make it more susceptible to statistical error. The index also assumes retirees shop at the same stores and live in similar locations as working-age Americans, which critics say may not accurately reflect the spending patterns of older adults.
The CPI-E gives housing a 49.1% weighting, while the CPI-W has a 42.7% weighting, according to the Congressional Budget Office, but Yahoo Finance reports that many retirees have paid off their mortgages, meaning housing may not always account for a large portion of their spending.
Advocates say seniors still need bigger benefit increases
Rising inflation is making it increasingly difficult for older Americans to pay for basic living expenses, the Seniors Alliance said. Executive Director Shannon Benton said many seniors already have difficulty affording basic health care due to rising costs.
“We are seeing rising inflation when more than half of our seniors can no longer afford a basic standard of living,” Seniors Alliance executive director Shannon Benton said in June. “Many seniors already have to skip doctor’s appointments due to cost, and in the long run it costs us all more when we switch from preventive care to urgent care,” Yahoo Finance said.
Benton said that while the projected 3.8% COLA increase is higher than last year’s 2.8% increase, it still won’t fully close the gap between retiree income and the cost of living. “A 3.8 percent COLA may sound like a lot compared to last year’s 2.8 percent, but it’s not enough to bridge the gap between what seniors bring in and what they need to live with dignity.”
