The Broken Social Security Rule That's Shortchanging Seniors (Again) in 2027

In the U.S., many seniors find themselves living just on Social Security because they didn't save much for retirement. And even people with savings often depend on their retirement benefits to cover the bills.

Unfortunately, Social Security is letting down retirees who rely on the program. While it is supposed to have protections in place to ensure that buying power doesn't fall over time, those protections have been failing. And that's likely to happen again in 2027.

As long as this troubling trend continues, retirees will find their financial situation a little worse each year. That's why it's important to understand what went wrong and why it's so hard to fix.

How Social Security calculates COLAs

The rule that's letting down seniors is one that's supposed to protect them. It has to do with cost-of-living adjustments, or COLAs.

COLAs are built into Social Security to allow for automatic benefit adjustments due to inflation. Without COLAs, rising prices could steadily erode what Social Security benefits can buy.

Under the COLA formula, retirees get a benefits bump based on how much a specific consumer price index changed during the third quarter of the year. Consumer price indexes track the cost of a basket of goods and services.

Third-quarter price index data from 2026 will be compared with data from the same quarter in 2025 to determine the COLA for 2027. Social Security recipients generally receive a benefit increase based on that percentage change. The problem is, this increase likely won't be enough.

Why the CPI-W can fall short for seniors

Unfortunately, the flaw in the COLA formula relates specifically to the price index used to calculate it. That price index, which is used to calculate the raise retirees get, is called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The problem, of course, is obvious from the name. The basket of goods and services that urban wage earners and clerical workers purchase is going to be different from the basket of goods and services retirees tend to buy.

There is a formula that tracks the spending patterns of older Americans. It's called the Consumer Price Index for Americans 62 years of age and older (R-CPI-E), commonly referred to as the CPI-E. But it's currently an experimental index, and it's not used for COLA calculations.

Why retiree spending can outpace the COLA

Unfortunately, because the wrong formula is used, the measure of inflation that determines the COLA is not capturing all of the inflation retirees experience.

Urban wage earners and clerical workers generally devote a much smaller percentage of their income to things seniors spend a lot of money on, like health care and housing.

Because older households devote different shares of their budgets to categories such as health care and housing, CPI-W may not always reflect the inflation they experience.

How much are seniors losing?

Seniors who collect Social Security have lost a lot of money because of the faulty COLA formula.

In fact, the Senior Citizens League estimated that the average person retiring in 2024 would have had more than $12,000 in additional lifetime benefits over a 25-year retirement if CPI-E had been used to calculate COLAs rather than CPI-W.

TSCL also estimated that benefits have lost 13.7% of buying power since 2016 alone. So while retirees may be getting raises on paper because of the COLAs, the flaw in the formula means they aren't actually getting a "real" raise.

Why the problem could continue in 2027

Unfortunately, this problematic trend is likely to continue into the new year, and potentially only get worse over time. That's true, in part, because Medicare premiums are expected to increase at a significantly higher rate than Social Security benefits.

HealthView Services research found that the average long-term inflation rate for Medicare Part B is estimated at 7%. For Medigap, the research projects 4.4% annual inflation plus a 3.5% age-related increase, bringing the total annual impact to about 8%.

Seniors got a 2.8% COLA in 2026, while The Senior Citizens League currently projects a 3.8% COLA for 2027. That benefits increase is well below the increase they're likely to experience in Medicare costs. As a result, retirees are likely to continue to see a substantial portion of their COLA eaten up by rising Medicare premiums, as those premiums are usually paid directly from Social Security.

Why switching to the CPI-E isn't simple

While the obvious answer to this issue seems to be changing the COLA formula to CPI-E, this solution isn't likely to be implemented, and it would create additional issues.

For one thing, the price index is experimental, and the Bureau of Labor Statistics reports there are several issues that potentially make CPI-E inaccurate.

The reserves in Social Security's Old-Age and Survivors Insurance (OASI) Trust Fund are expected to run dry in 2032. At that point, continuing income would be enough to pay about 78% of scheduled benefits.

If a change to CPI-E was made, making the COLA larger would only exacerbate this situation as the government would have to pay out higher benefits without any increase in revenue to offset the extra expense.

Bottom line

The reality is that COLAs are not helping retirees maintain buying power as they should. And seniors see their benefits decline in real value because of this. This can hit hard later in retirement when seniors tend to need Social Security more as their savings may be dwindling.

Retirees need to prepare and plan for this by investing more throughout their lifetime. Failing to do so could be a financial mistake retirees would come to regret.

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