Social Security’s 2027 COLA Forecast Was Just Updated. There’s Good News and Bad News for Retirees.

Inflation recently hit a three-year high. That means Social Security benefits are losing purchasing power at the fastest rate in three years. Naturally, many beneficiaries are concerned.

A 2026 survey from the Employee Benefit Research Institute shows just 73% of retired workers believe they have enough money to live comfortably in retirement. That represents a five-percentage-point drop from 2025, and it marks the lowest confidence in over a decade.

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The Social Security Administration will not announce the next cost-of-living adjustment (COLA) until October 2026, and the raise won’t take effect until January 2027. But Social Security beneficiaries are already eager to know how much extra income they will receive next year.

Here’s the good news and the bad news.

The good news: Social Security benefits are on pace for a much larger COLA next year

Social Security beneficiaries receive annual cost-of-living adjustments (COLAs) to help them keep up with rising prices across the economy. COLAs preserve the buying power of benefits by ensuring payouts increase at the same pace as inflation. In this scenario, inflation is measured with the CPI-W, a subset of the broader Consumer Price Index (CPI).

Here’s how the math works: The CPI-W from the third quarter (July through September) of the current year is divided by the CPI-W from the third quarter of the previous year, and the percent increase becomes the COLA in the following year. For instance, the CPI-W increased 2.8% in the third quarter of 2025, so Social Security benefits received a 2.8% COLA in 2026.

Benefits are on pace to receive a much larger COLA next year. The Senior Citizens League (TSCL), a nonpartisan advocacy group, recently raised its 2027 COLA forecast to 3.9%, up from 2.8%. The dramatic upward revision reflects a recent acceleration in inflation tied to the Iran war, as well as a high probability that inflation will remain elevated through the third quarter.

To elaborate, the Iran conflict has effectively closed the Strait of Hormuz, a waterway in the Persian Gulf used as a shipping route for a substantial percentage of the world’s oil supply. In turn, oil prices have increased 50% since late February, and CPI-W inflation accelerated to 3.9% as of April, the highest reading in three years.

Importantly, while elevated energy prices are currently the most consequential reason that inflation has accelerated, price increases will soon spread to other areas of the economy due to higher transportation and manufacturing costs. Indeed, a forecasting tool from the Federal Reserve Bank of Cleveland shows CPI inflation trending above 4% in May.

Let’s assume TSCL is correct in forecasting a 3.9% COLA in 2027. The chart below shows how the average Social Security payment to different beneficiaries would change.

Data source: The Social Security Administration. Benefit amounts are rounded to the nearest dollar.

As shown above, if Social Security recipients receive a 3.9% COLA in 2027, the average retired-worker benefit would increase by about $81 per month to $2,162. That represents an additional $972 for the full year.

The bad news: A larger COLA is not necessarily a good thing

Large COLAs are generally bad news in disguise. They are a product of high inflation, and Social Security benefits have historically failed to keep pace with it over long periods.

Research from TSCL suggests Social Security benefits lost nearly 14% of their purchasing power over the past decade because COLAs were too small. Many policy experts say the problem lies in how COLAs are calculated. They see the CPI-W as a poor measure of inflation for seniors because it is based on the spending habits of younger adults.

So what? Seniors spend money differently from young adults, so TSCL argues that COLAs should be tied to an inflation index that accounts for those differences. For instance, the CPI-E tracks prices based on the spending habits of adults aged 65 and older. However, in the absence of that change, Social Security benefits are likely to retain more purchasing power when inflation is low and COLAs are small.

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Social Security’s 2027 COLA Forecast Was Just Updated. There’s Good News and Bad News for Retirees. was originally published by The Motley Fool