How Advisers Should Interpret the Recent COLA Increase for Clients

After the Social Security Administration confirmed that benefits will increase by an average of $75 per month in 2027, industry experts highlighted the importance of educating participants on Social Security’s role in retirement planning.

According to a viewpoints article published by Fidelity Management & Research Company LLC the day after the announcement, policymakers can take three different approaches to Social Security’s impending insolvency.

Federal lawmakers continue to debate a range of measures to address the program’s long-term funding challenges, which include its main trust fund, the Old-Age and Survivors Insurance Trust Fund, currently estimated to deplete its reserves by the third quarter of 2032.

Proposed solutions highlighted in Fidelity’s analysis include modifying benefits, increasing program revenue through taxes and expanding the number of workers contributing to the system.

Using COLA as an Educational Opportunity

For advisers, Fidelity’s analysis suggested the latest COLA should serve as a reminder to discuss retirement income planning with clients, including boosting savings, delaying Social Security benefits when appropriate and developing additional sources of retirement income.

“One major factor that we have our clients consider is inflation impacts when it comes to their expenses. Using a long-range inflation average can help smooth out the ups and downs of inflation assumptions,” wrote Frank Maltais, vice president and financial consultant at Fidelity Investments in an email to PLANADVISER.

For plan sponsors, however, the COLA may be most valuable as an employee engagement opportunity. Katie Colon, a vice president and financial adviser at CAPTRUST, says employers have a natural opening to discuss retirement readiness, savings behavior and long-term financial planning. 

“It’s a really good opportunity for plan sponsors to discuss broader financial and retirement planning topics, especially with [the current rate of] inflation,” Colon says. “It’s an important conversation on how Social Security will fit into their overall retirement income strategy.” 

Rather than focusing solely on the benefit increase itself, she says sponsors should consider whether participants are adequately saving for retirement and what additional resources employers can provide to help employees succeed. 

CAPTRUST’s research on financial wellness, Colon says, has found that workers often prefer personalized guidance to traditional group education sessions, particularly when discussing sensitive financial topics. As a result, Colon says access to one-on-one fiduciary advice and planning resources tailored to different career stages can be especially effective. 

She adds that while Social Security remains an important component of retirement income, it should not be viewed as a participant’s only source of retirement security.  

“I think it’s important for plan sponsors to focus on increasing retirement outcomes or enhancing retirement outcomes for the employees when it comes to their retirement benefits,” Colon says. “Also having access to personalized financial advice [matters] … because we know that it’s important to diversify your assets, to not just have everything in one Social Security bucket.” 

Needing More Than Just Policy  

Fidelity argued that while Congress has historically acted to preserve Social Security benefits, workers should still prepare for uncertainty by strengthening other sources of retirement income. 

According to Fidelity, a hypothetical married couple receiving approximately $48,400 annually in Social Security benefits could face a reduction of roughly $10,560 per year if benefits were cut by 22% following a trust fund shortfall. The firm estimated that replacing that lost income through portfolio withdrawals could require withdrawing roughly $118,000 over 10 years. When accounting for foregone investment growth, the total impact on the portfolio could exceed $161,000 over the same period. 

As a result, Fidelity suggested several steps retirement savers can take to improve retirement readiness, regardless of whether lawmakers ultimately enact reforms. 

One strategy is delaying Social Security benefits. Under current law, workers who wait until age 70 to claim benefits, rather than claiming at the full retirement age of66 or 67 can increase their monthly benefit by roughly 8% annually. 

The firm also suggested maximizing workplace retirement savings opportunities, including catch-up contributions available to participants age 50 and older.  

“There is always the possibility that inflation ends up being higher than the projections within any planning program, so it’s important for investors to be aware. A common misconception is that COLA will always keep up with inflation, however some expenses, such as health care, have historically inflated a higher rate,” wrote Maltais. “The key I share with clients is to not over index important decisions tied to speculating on what may or may not happen, but rather to focus on the known facts of today.”