Social Security's 2027 cost-of-living adjustment will be larger only if inflation is worse. Retirees better be careful what they wish for.

And they still hope for a bigger COLA. Their wish is akin to hoping for a bigger house fire so they can receive a bigger payout from their homeowners' insurance.

We don't yet know the exact COLA that Social Security will use in 2027, since it is based on the CPI levels in July, August and September of this year, and the last of these inputs won't be announced until October. The AARP is projecting that the COLA will be 3.6% - which would be the largest since the 8.7% adjustment in 2022.

The highest Social Security COLA occurred in 1980, when it was 14.3% - reflecting the double-digit increase in the consumer-price index in 1979. Just like today, Social Security beneficiaries in 1980 may have believed that, because that year's COLA was higher than in previous years, they were going to be better off than before.

They were kidding themselves, of course. They were guilty of what economists refer to as money illusion - confusing nominal dollar amounts with real, or inflation-adjusted, levels. To the extent the COLA accurately reflects inflation, your Social Security payments won't change from year to year, in real terms.

There has been a significant number of stories recently about next year's COLA. But focusing on the COLA's magnitude is much ado about nothing.

How well does the Social Security COLA reflect inflation? The accompanying chart provides an answer. It plots the annualized changes of three different series since 1982 (the first year for which data exist for all three):

-- The Social Security COLA

-- The consumer-price index for urban wage earners and clerical workers (CPI-W), the particular version of the CPI that the Social Security Administration uses to calculate its COLA

-- The consumer-price index for Americans 62 and older (CPI-E), a version of the CPI intended to reflect inflation that is uniquely endured by the elderly.

All three have produced similar annualized rates of change over the last 42 years. For example, the Social Security COLA rose at a 2.99% annualized rate between 1982 and 2025, just 9 annualized basis points greater than the CPI-E's rate of increase.

What's the real-world impact of a 9-basis-point difference in COLA? Based on the current average monthly Social Security benefit, it works out to $1.88 per month.

Rather than obsessing about the Social Security COLA, a far better use of our time would be to lobby elected representatives, urging them to ensure that the Social Security system is fully funded well into the future. As it is now, of course, beginning in 2032, the Social Security Administration will only be able to pay out 78% of the benefits to which recipients would otherwise be entitled. Based on the current average Social Security benefit, that translates to a reduction of $459 per month.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert