What Sponsors Should Know About COLA Increases

After the Social Security Administration confirmed that benefits will increase by an average of 3.6% or an average $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 benefit reductions.

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 include modifying benefits, increasing program revenue through taxes and expanding the number of workers contributing to the system.

Discussions have included raising the age at which participants can claim maximum benefits; increasing earnings subject to Social Security payroll taxes; and expanding participation among certain worker groups.

Using COLA as an Educational Opportunity

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.”

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

Needing More Than Just Policy

Fidelity argued that while Congress has historically acted to preserve Social Security benefits, workers should still prepare for uncertainty about the program’s future 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 depletion of the trust fund. 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 claiming Social Security benefits. Under current law, workers who wait until age 70 to claim benefits, rather than claiming at the full retirement age or 66 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.