Boston University economist Laurence Kotlikoff estimates that Social Security's 2027 cost-of-living adjustment (COLA) will come in around 3.4%, below AARP's 3.6% projection. More importantly, he argues that the whole annual-adjustment approach leaves recipients exposed to rising prices.

In an exclusive interview with MarketDash, Kotlikoff, professor of Economics at Boston University and a research associate at the National Bureau of Economic Research, said, "3.4% is kind of my best estimate right now."

Rich Johnson, AARP's vice president for financial security, told MarketDash in an email that AARP continues to project a 3.6% increase for benefits beginning in January 2027, though September inflation data could nudge the final figure slightly higher or lower. AARP published its 3.6% forecast on Sept. 11.

The Social Security Administration is expected to announce the official adjustment on Wednesday, following the release of September inflation data.

Kotlikoff Calls for Monthly COLA Adjustments

Social Security's COLA is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), based on third-quarter inflation readings. The 2026 COLA was 2.8%.

Kotlikoff argued that annual adjustments do not immediately reflect price changes throughout the year.

"When you have inflation, you should be indexing on a monthly basis, not a yearly basis," Kotlikoff said.

Asked whether retirees would gain purchasing power even if the 2027 adjustment exceeded last year's increase, Kotlikoff said, "I expect they'll lose purchasing power over the course of the year," citing faster inflation.

AARP Says CPI-W Falls Short for Older Adults

Johnson said the CPI-W does not fully reflect older adults' inflation experience because they generally spend a larger share of their income on housing and medical care and a smaller share on transportation, food and apparel than younger consumers. He said the index was used when the COLA was created in the 1970s because it was the inflation measure available at the time.

AARP's survey published Monday found that 76% of adults ages 50 and older disagreed that a projected 3.5% COLA would keep up with rising prices. Another 71% said an increase between 5% and 8% would be sufficient. The survey covered 1,023 U.S. adults ages 50 and older. The 3.5% figure was the scenario presented to respondents, while AARP's forecast remains 3.6%.

Johnson noted that AARP opposes raising the retirement age because it would cut benefits. Raising the full retirement age by two years amounts to as much as a 16% benefit cut, or the loss of about $320 per month for someone receiving an average benefit, he added.

Social Security Funding Remains a Concern

The 2026 Social Security Trustees Report projects that the Old-Age and Survivors Insurance Trust Fund will deplete its reserves in the fourth quarter of 2032. At that point, continuing income would cover 78% of scheduled benefits.

Johnson said the COLA would have only a modest impact on the trust fund because inflation can increase benefit payments while also lifting payroll tax revenue as wages rise.

Kotlikoff argued that switching to an index that produces higher benefits for older adults relative to overall consumer prices could add financial pressure to the program.

What Kotlikoff Tells Younger Workers

Kotlikoff urged young workers concerned about Social Security's long-term financial outlook to support personal security accounts, arguing that broader reforms are needed to address the country's mounting fiscal pressures.

He also called for a universal health care system that limits spending, pointing to Sweden and Japan as examples he said deliver better outcomes at lower costs than the U.S. He argued that Social Security, health care, defense spending, and interest payments all contribute to the country's broader fiscal challenges.

Disclaimer: This content was produced with the help of AI tools and was reviewed and published by MarketDash editors.