Key Points
Retirees are still six months away from the annual Social Security cost-of-living adjustment (COLA) announcement, and fluctuating inflation rates are making it hard for many to budget. The annual COLA is directly tied to inflation in the prior year, which can lead to a frustrating result for many retirees: They experience inflation before their monthly payments catch up with higher prices.
The best retirees can do is look to expert analysts’ forecasts for what they might expect next year’s COLA to be while they try to find room in their budgets amid today’s rising prices. Unfortunately, the recent CPI report for March has led to some wild swings in some of those forecasts.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
Image source: Getty Images.
How the government calculates your COLA
As mentioned, the annual COLA is based on price inflation from the prior year. Specifically, the Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The index tracks a basket of goods and services that reflect the average spending of the target demographic.
But the SSA doesn’t track the index throughout the year. It uses the average year-over-year increase in CPI-W for the third quarter of each year. That means the 3.3% increase we saw in the inflation metric for March won’t directly have any impact on next year’s COLA.
However, the early index readings combined with commentary from the Federal Reserve and market data from bond traders can give analysts some good information about where the reading could be in July when the data starts counting.
March’s 3.3% increase in the CPI-W is a notable acceleration from earlier in the year, and it’s led to significant changes in analysts’ forecasts since the start of the year.
Where the experts think the 2027 COLA will land
There are two common sources for Social Security COLA estimates: The Senior Citizens League, a senior advocacy group, and Mary Johnson, an independent Social Security and Medicare analyst. Both developed models to predict the COLA, and they update them monthly when new CPI data is released.
With the March CPI release, The Senior Citizens League now estimates retirees will receive a 2.8% increase to their monthly payments. That’s unchanged from its analysts’ estimates in January and February. Their model may be heavily weighing core inflation, which disregards volatile food and energy pricing early in the year. Core CPI increased 2.6% year over year last month.
Mary Johnson, however, thinks higher prices might stick around through the summer. She updated her model, and she now expects a 2027 COLA of 3.2%. That’s a big jump from the 1.7% forecast she provided last month and the 1.2% increase her model was predicting back in February.
The discrepancy in the models and Johnson’s big leap in her prediction are indicative of significant uncertainty about where prices are headed. The Federal Open Market Committee (FOMC) and Chair Powell have indicated that their expectations for inflation have climbed since the start of the year. That’s echoed in futures traders’ expectations for where interest rates will land by the end of the year, which have climbed considerably since the start of the war in Iran.
Importantly, seniors should hope for a COLA similar to what they received this year, perhaps a bit lower. As mentioned, the COLA is backward looking. That means seniors are paying higher prices today and won’t receive a pay bump until next year. Slow and steady inflation reduces the pain of that dynamic. So, if inflation comes back down, as The Senior Citizens League expects, it would be a best-case scenario for retirees.
The $23,760 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Join Stock Advisor to learn more about these strategies.
View the “Social Security secrets” »
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
