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Social Security is set to get its largest cost-of-living adjustment (COLA) since 2023 in January 2027. The 3.6% increase will add roughly $75 to the $2,089 average monthly retirement benefit as of September 2026. This will give the typical senior about $900 more next year.
More money is usually seen as a positive, and this above-average COLA could help seniors who have been struggling with rising costs throughout 2026. But it also comes with a couple of surprising drawbacks worth bearing in mind when planning your retirement budget over the next few years.
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Seniors may owe Social Security benefit taxes on up to 85% of their checks each year, depending on their provisional income. This is your adjusted gross income (AGI), plus any nontaxable interest and half your annual Social Security benefit. The following table breaks down what percentage of your benefits could be taxable based on your provisional income and marital status:
0% of Benefits Taxable If Provisional Income Is Below:
Up to 50% of Benefits Taxable If Provisional Income Is Between:
Up to 85% of Benefits Taxable If Provisional Income Exceeds:
These thresholds aren't indexed for inflation, so it's possible that larger Social Security benefits next year could cause you to owe these benefit taxes for the first time or increase the amount that you owe.
You may be able to avoid this by reducing your withdrawals from taxable retirement accounts. But if this isn't possible, you'll need to plan for these taxes in your budget. Consult with an accountant if you need personalized advice.
The latest Social Security Trustees' Report says the program could face a 23% benefit cut in just six years unless Washington intervenes. But that report was released in June 2026, well before the 2027 COLA was announced.
It's possible that this above-average benefit increase could increase Social Security's expenses enough to accelerate the insolvency date, forcing Washington to act sooner to avoid benefit cuts. We won't know whether that's true, though, until we get new projections from the government.
There isn't much ordinary seniors can do about this, other than to budget carefully and keep an eye out for future Social Security changes. Once we know what will happen next, it'll be time to rethink your budget.
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2 Hidden Downsides to the 3.6% 2027 Social Security COLA was originally published by The Motley Fool
