Key insights
- Rising inflation, exacerbated by geopolitical tensions (Iran war), is projected to push the 2027 Social Security COLA to 4.2%. This reflects a significant increase in the CPI-W, impacting consumer spending and potentially pressuring the Federal Reserve to maintain a hawkish stance on interest rates. Higher inflation erodes consumer purchasing power, posing a downside risk to equity valuations.
Social Security’s cost-of-living adjustment could be as high as 4.2% in 2027 — up from 2.8% this year — due to rising inflation, which has jumped to a three-year high, and the impact of the war with Iran, Social Security analysts said on Tuesday.
“This represents the highest rate of inflation since 2022 and a potentially significant erosion in many consumers’ standard of living,” said Mary Johnson, an independent Social Security and Medicare policy analyst who has been tracking the COLA for 30 years.
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Before the war with Iran started in late February, Johnson had predicted the COLA would be 1.2% for 2027. However, gasoline and energy prices, as well as the cost of fresh produce and other groceries, have surged since the start of the conflict, pushing the COLA forecast much higher, to 4.2%, Johnson said.
The COLA is not a raise but an adjustment to keep pace with inflation. It is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which is now at 3.9% year over year, according to inflation data released Tuesday by the Bureau of Labor Statistics. Overall, the yearly rate of inflation climbed to 3.8%, up from 3.3% in the prior month.
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The average Social Security check is about $2,071, according to the Social Security Administration. A 4.2% COLA would add about $87 a month.
The Senior Citizens league, an advocacy group for older adults, predicted the 2027 COLA could climb to 3.9%. That increase would be consumed by higher costs for Medicare premiums, housing, utilities and groceries, the group said. The group’s previous forecast, published last month, was for a COLA of 2.8%.
Older people are cutting back on essential healthcare services in order to make ends meet, the group said. A recent survey by the Senior Citizens League found that 57% of older adults had skipped one or more medical products or services in the past year due to costs.
“For retirees living on fixed incomes, the costs that matter most, especially healthcare, housing, utilities and insurance, continue to rise faster than prices in the rest of the economy, silently wrenching seniors dry,” said Shannon Benton, executive director of the Senior Citizens League. “This makes the national affordability conversation even more important than ever.”
The rising COLA forecasts come as Social Security itself faces financial problems. The trust funds that back Social Security will run out in 2032 unless Congress acts to shore up the system before then, according to the Congressional Budget Office. At that time, benefits would be automatically cut by about 24% for all beneficiaries. The CBO is the nonpartisan federal agency that provides Congress with independent analysis of budgetary and economic issues.
Among Americans 65 and older, 40% rely on Social Security for half or more of their income, while about 14% of recipients 65 and older depend on it for 90% or more of their income, according to AARP.
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