Social Security recipients may see largest pay raise in 3 years in 2027 - USA Today

Social Security recipients may get the largest pay raise in three years in 2027, according to new calculations that include the latest August inflation data.

Next year's cost-of-living-adjustment, or COLA, is forecast to be 3.5%, which is up from last month's 3.4% estimate and would be the biggest since 2023's whopping 8.7% increase, said Mary Johnson, independent Social Security and Medicare analyst.

The COLA is based on the average inflation rate in July, August and September, compared to the same period the previous year. Once September's inflation rate is known, analysts and the Social Security Administration will be able to calculate what the official 2027 COLA will be. SSA is expected to announce that on Oct. 14.

The COLA is a yearly increase to Social Security benefits meant to help payments keep up with rising costs of necessities like food, rent and utilities, but seniors have argued that it hasn't kept up with the prices they've had to pay. In recent years, Medicare Part B premiums alone, usually deducted straight from monthly Social Security checks, have swallowed much of COLA. And now, with Social Security's trust fund predicted to dry up by the end of 2032, some policy analysts are looking to cap the COLA in various ways.

“Pay close attention to the debate over Social Security solvency now,” Johnson said. "It’s important for midterm voters to understand the changes to Social Security that members of Congress face to shore up the program. COLAs and your Social Security benefits are in the crosshairs."

The COLA each year is based on average annual increases in the consumer price index for urban wage earners and clerical workers (CPI-W) from July through September.

The index for urban wage earners (CPI-W) largely reflects the broad index the Labor Department releases each month, although it sometimes differs slightly. Last month, the overall consumer price index (CPI-U) rose 3.4% annually and the index for urban wage earners increased 3.5%.

If the final 2027 COLA ends up 3.5%, as Johnson predicts, the average monthly benefits check would increase by about $70.

Since there's one more month of inflation used to calculate the final 2027 COLA, there's a chance the COLA could still edge up.

“A lot depends on highly volatile oil prices which are beyond my ability to forecast, so I leave this to others, or the betting markets to sort out for us,” Johnson said.

Oil prices have been the largest culprit in keeping inflation elevated, with ongoing fighting with Iran disrupting oil supplies. Gas prices accounted for more than a third of the monthly increase, rising 3.9% in August alone, according to the Bureau of Labor Statistics. Energy prices overall rose 2.1% last month.

Meanwhile, nationwide average diesel prices hit a record high on Sept. 11 of $6.05 per gallon, according to AAA. Since vehicles used for farming, trucking food and other goods, and mail and parcel deliveries usually run on diesel, prices of almost everything may rise soon, analysts said. Since the war with Iran began in late February, the nationwide average diesel price has soared by 60%.

If the trust fund that supplements incoming payroll taxes to pay monthly Social Security benefits runs out of money by the end of 2032, as the program's trustees predict, the law requires benefits to be reduced by an estimated 22% to ensure the program’s costs do not exceed its revenue.

And the timing of that couldn't be worse. The lower Social Security benefits would come around the same time Medicare will have to implement cuts of its own, further squeezing retirees.

The fund that helps fund Medicare Part A, which pays for services such as inpatient hospital stays, skilled nursing and other post-acute care services, and hospice care for Medicare beneficiaries, is expected to be depleted around the middle of 2033. At that point, the fund will be able to reimburse providers only 89 cents for every dollar of Part A services provided.

That means an 11% cut in spending or substantial tax increases will be needed to cover the shortfall, said Ciannah Correa and Erica Socker in a blog post last month for Georgetown University's Medicare Policy Initiative.

But Medicare Part A cuts are only part of Medicare's issues, they said. "Perhaps an even more important part of the story relates to spending in the rest of the Medicare program," the researchers wrote. Medicare also encompasses Part B for outpatient care, doctor visits, preventive services and medical supplies, and Part D drug coverage.

Part B and Part D aren't in danger of insolvency because they're financed through a combination of Medicare beneficiary premiums and federal general revenue, primarily corporate and personal income taxes. As the cost of providing the services covered by Parts B and D grows, so do premiums beneficiaries pay and tax revenues needed to fund the Medicare program.

Earlier this year, the Medicare Trustees estimated that the monthly base Medicare Part B premium for 2027 would increase $6.60 to $209.50 from $202.90 per month.

Many ideas to shore up Social Security and head off benefits cuts have been floated but none have gained enough traction to pass Congress. Some of the most widely suggested include gradually raising the full retirement age to 70 years old from 67 now, raising the payroll tax that funds Social Security, increasing the $184,500 Social Security tax cap so wages above that can be taxed to increase revenues to the fund, or slowing down annual COLA increases.

But Johnson warned that lawmakers touting a COLA change "tend to say that Social Security recipients are 'overpaid,' yet studies of rising costs compared to COLA increases have found this is not the case. Even with the current ... inflation adjustment, the buying power of Social Security benefits tends to erode over time. Millions more retirees risk falling into poverty and not having enough to pay for food, shelter or even the electric bill if COLAs are reduced."

The nonpartisan, nonprofit Committee for a Responsible Federal Budget (CRFB) last month wrote that "despite claims to the contrary, workers collect more in benefits than they and their employers pay in taxes, even on a present value basis." Retirees receive all of their contributions, plus interest, plus an additional 33 cents for every $1 they and their employer paid in, it said.

Based on the August inflation data, CRFB estimates the 2027 COLA at 3.4%, a tenth of a percentage point below Johnson's, but  0.6 percentage points higher than the 2.8% COLA in 2026, and 0.7 percentage points higher than the Social Security Trustees’ projection of 2.7%.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.