Today marks a significant moment for Social Security: the announcement of the cost-of-living adjustment (COLA). The only other day that might rival this is when the COLA takes effect in January.
Starting next year, those receiving Social Security will see a 3.6% increase in their monthly benefits, which is 0.8% more than this year’s adjustment. While a higher COLA can offer some financial relief, it’s important to remember that it often accompanies high inflation—these two factors are closely linked.
Now, let’s break down how we arrived at this above-average COLA.
The inflation metric that Social Security considers
The CPI-U serves as the primary inflation indicator for the country, showing a year-over-year increase of 3.7% in September. However, Social Security relies on the CPI-W for its annual COLA calculation. This metric focuses on the expenses faced by hourly wage earners and clerical workers, which accounts for around 30% of the U.S. population.
In September, the CPI-W recorded a year-over-year rise of 3.9%, marking its second highest increase this year, following a notable 4.4% spike in May.
The distinction between the CPI-U and CPI-W lies in how they weigh various expenses. For instance, the CPI-W places greater emphasis on costs like rent, transportation, food and beverages, clothing, and utilities. Since April, CPI-W has consistently outstripped CPI-U, only matching it in March.
How inflation led to the 2027 COLA
The COLA for 2027 represents the fifth highest adjustment seen in the last 35 years. This noticeable increase is largely driven by rising energy costs, particularly due to ongoing conflicts in the Middle East. With the Strait of Hormuz’s closure—critical for 20% to 25% of the global oil supply—energy prices have surged significantly. For September alone, here are the year-over-year increases in energy costs:
- Energy (overall): 20.4%
- Gasoline (all types): 34.2%
- Fuel oil: 74.2%
- Energy services: 4.6%
- Electricity: 4.4%
- Utility gas service: 5%
If you’ve had to fill your gas tank or settle utility bills recently, this spike likely isn’t shocking. While inflation saw a slight dip in July and August—CPI-W increased by 3.4% and 3.5%, respectively—it picked up pace again in September, fueled by renewed geopolitical tensions. July and August are particularly relevant since the COLA is calculated based on the inflation figures from those months, along with September, which together represent the third quarter.
Social Security calculates the average CPI-W for Q3, compares it with the average from the previous year, and sets the COLA based on the percentage increase, rounding to the nearest tenth. This year, the CPI-W average was 3.62% higher than in 2025, hence the 3.6% COLA for 2027.
Even though next year’s adjustment won’t directly alleviate the current inflation pressures experienced by recipients, having the official figure allows them to start planning their budgets for 2027. It’s likely that the COLA won’t fully offset inflation, but it’s definitely a step in the right direction.
