Inflation was high for most of the year as geopolitical events pushed up commodity prices. So it’s not really surprising that Social Security’s cost-of-living adjustment (COLA), intended to help retirees fight inflation, is higher than average.
The 3.6% COLA for 2027 is the third highest since 2012 and the fifth highest in the last 35 years. This considerable increase is surely welcomed by retirees, but not everything is so encouraging. Retirees still face two key issues: the future of benefits and the extent of their current benefits.
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Social Security continues to operate in deficit
Social Security is primarily funded by tax revenue, and for a time the program collected more than it paid out in benefits. Unfortunately, this has no longer been the case since 2009 and the program has had to draw on the Old Age and Survivors Insurance (AVS) trust fund.
The AVS trust fund is not an unlimited pool of money, and according to the Social Security Administration (SSA), the program can only pay benefits at its current rate through the fourth quarter of 2032. After that, the trust fund will be depleted and the program will only be able to pay 78 percent of benefits because it will have to rely solely on incoming tax revenue.
U.S. Old Age and Survivors Insurance Trust Fund Spending Data by YCharts
A high COLA of 3.6% will provide financial relief to retirees, but it could also accelerate financial pressure on the trust fund. There is no indication that the money injected into the system next year will be enough to offset the 3.6% increase in benefits that the SSA will have to pay.
The only short-term solution will have to come from Congress. Whether it’s raising taxes on wages or raising the ceiling on income subject to social security contributions (both measures will be unpopular), it will remain the elephant in the room.
Yesterday’s dollar is not today’s dollar
Although Social Security recipients have regularly received annual increases in their benefits (except in 2010, 2011, and 2016), these increases have not fully offset the real inflation that retirees experience in their daily lives. Social Security benefits lost 13.7% of their purchasing power between 2016 and 2026, according to senior advocacy group The Senior Citizens League (TSCL).
Tens of millions of retirees rely on Social Security for their entire retirement income. The loss of purchasing power affects everyone, but it can particularly impact the household budgets of those who are entirely dependent on social security.
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