Inflation’s Impact on Social Security Benefits

Recently, inflation hit a three-year high, which means that Social Security benefits are, unfortunately, losing their purchasing power faster than they have in quite some time. It’s only natural that this has many beneficiaries worried.

A survey from the Employee Benefit Research Institute conducted in 2026 revealed that just 73% of retired workers are confident they’ll have enough money to live comfortably in retirement. This marks a 5% decline from the previous year and represents the lowest level of confidence in over ten years.

The Social Security Administration won’t announce the upcoming cost of living adjustment (COLA) until October 2026, with changes taking effect in January 2027. Still, recipients are already curious about what their payments might look like next year.

There’s a mix of good and bad news surrounding this.

Positive Outlook: Potential for Significant COLA Adjustments Next Year

Social Security beneficiaries receive annual adjustments to their benefits, called COLA, to keep pace with inflation. This is meant to maintain their purchasing power. Generally, inflation is gauged using a specific measure called the CPI-W, which is part of the broader Consumer Price Index (CPI).

The calculation for COLA is relatively straightforward: you take the CPI-W for the third quarter of the current year and compare it to the same quarter of the previous year. The percentage increase gives the following year’s COLA. For instance, if CPI-W rose by 2.8% during the third quarter of 2025, then recipients enjoyed a 2.8% COLA for 2026.

Next year’s adjustments might be even more substantial. The nonpartisan group, Senior Citizens Alliance (TSCL), has increased its 2027 COLA forecast from 2.8% to 3.9%. This adjustment reflects a recent uptick in inflation, partly due to the conflict in Iran, which is expected to keep inflation elevated.

To elaborate, the unrest in Iran has, in effect, closed the Strait of Hormuz—a crucial shipping route for global oil. Since February, oil prices have surged by 50%, and by April, CPI-W inflation reached 3.9%, the highest in three years.

While energy prices are currently the most significant contributor to rising inflation, other sectors are likely to follow suit as transport and manufacturing costs increase. Indeed, a forecasting tool from the Cleveland Fed indicates that CPI inflation could exceed 4% in May.

If TSCL’s prediction of a 3.9% COLA for 2027 holds true, it’s interesting to note how various Social Security payments could change. Here’s a quick overview:

If beneficiaries indeed receive a 3.9% adjustment, an average recipient’s monthly benefit could rise by about $81, bringing the total to around $2,162 and adding up to an extra $972 each year.

Negative Aspects: Large COLAs May Signal Trouble

Larger COLAs might not always be a positive sign. Often, they stem from high inflation, and historically, Social Security benefits have struggled to keep pace over the long term.

Research from TSCL highlights that benefits have lost nearly 14% of their purchasing power over the last decade, mainly because COLAs have failed to keep up. Many experts suggest that the current method for calculating COLAs is flawed. They argue that the CPI-W isn’t a reliable indicator for older populations, as it’s based on younger consumers’ spending patterns.

This raises the question: why does it matter? Seniors tend to allocate their funds differently than younger individuals, so TSCL advocates for adjustments based on an inflation index that reflects their unique spending habits. For example, the CPI-E tracks costs specifically for those aged 65 and older. Until such changes are made, it seems likely that Social Security benefits will maintain more purchasing power if inflation remains low and COLAs are modest.