Even though Social Security’s cost-of-living adjustment (COLA) may accomplish something not seen in roughly three decades, this historic benefit increase is likely to fall short for most retirees.
In June, more than 51 million retired workers who received a monthly benefit from Social Security took home an average of $1,918.28. This amounts to a little over $23,000 on an annualized basis. While this might not sound like a lot of money, Social Security income has, for decades, proved vital to helping retirees make ends meet.
In addition to America’s top retirement program pulling 22.7 million people above the federal poverty line in 2022 (including 16.5 million adults aged 65 and over), 23 years of annual surveys by pollster Gallup have shown that 80% to 90% of retirees lean on their monthly payout, in some capacity, to cover their expenses.
- More than 51 million retirees receive monthly Social Security benefits.
- The average monthly benefit is $1,918.28, totaling over $23,000 annually.
- Social Security income is crucial for helping retirees make ends meet.
- In 2022, Social Security lifted 22.7 million people above the federal poverty line.
- Gallup surveys show that 80% to 90% of retirees rely on these monthly payouts.
Despite the upcoming historic increase in benefits, many retirees may still find it challenging to cover their living expenses solely with Social Security income. This underscores the continued importance of planning for additional sources of retirement income.
With most recipients reliant on their monthly Social Security check, it’s no surprise that the announcement of the cost-of-living adjustment (COLA) in October is highly anticipated. Although forecasts suggest that Social Security’s 2025 COLA will be historic, beneficiaries may still find themselves disappointed.
Why is Social Security’s COLA so Important to Retirees?
As a consumer, you’re likely aware that the prices you pay for goods and services change over time. The “job” of Social Security’s COLA is to measure these price changes for a broad basket of goods and services and adjust benefits annually to ensure that recipients don’t lose purchasing power.
Before 1975, there was no consistent schedule for these adjustments. Special sessions of Congress approved just 11 COLAs between 1940 and 1974, with none passed during the entire decade of the 1940s.
Since 1975, America’s leading retirement program has relied on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to measure annual inflationary changes. The CPI-W encompasses over half a dozen major spending categories, each with numerous subcategories, all carrying individual weightings. These percentage weightings allow the CPI-W to be expressed as a single figure each month, facilitating quick and clear comparisons to previous months or years.
Understanding the CPI-W and Its Impact
The CPI-W is crucial for calculating Social Security’s cost-of-living adjustment (COLA). However, it’s important to note that only the trailing 12-month CPI-W readings from the third quarter (July through September) are utilized. While the final readings from the other nine months can help identify price trends, they are not considered in the COLA calculation.
How the COLA Calculation Works
If the average CPI-W reading from the third quarter of the current year surpasses the average CPI-W reading from the same period last year, it indicates that inflation (rising prices) has occurred. This comparison is crucial as it determines whether there will be an adjustment to Social Security benefits to help recipients maintain their purchasing power.
In summary, the CPI-W plays a pivotal role in ensuring that Social Security benefits keep pace with inflation, helping retirees manage their living expenses effectively. Understanding this mechanism is essential for anyone relying on Social Security as a significant part of their retirement income.
When prices rise, so do Social Security benefits. The year-over-year percentage increase in the average third-quarter CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers), rounded to the nearest tenth of a percent, determines how much benefits rise in the coming year.
Predicting Social Security’s 2025 Cost-of-Living Adjustment
Over the last 15 years, the cost-of-living adjustments (COLAs) have often been underwhelming. There were years, such as 2010, 2011, and 2016, when no COLA was implemented. In 2017, beneficiaries saw the smallest positive COLA on record, a mere 0.3%. In total, 10 of the last 15 COLAs have been 2% or below.
Recent Trends in COLA Increases
However, the three most recent COLAs have defied this trend. In 2022, 2023, and 2024, Social Security checks increased by 5.9%, 8.7%, and 3.2%, respectively. Notably, the 8.7% COLA in 2023 was the largest percentage increase in 41 years and the greatest nominal-dollar boost to monthly benefits since the program’s inception.
- 2022: 5.9% increase
- 2023: 8.7% increase
- 2024: 3.2% increase
As we look forward to 2025, the anticipation builds. Will the trend of significant increases continue, or will we see a return to more modest adjustments? Stay tuned as we monitor the CPI-W and other economic indicators that will shape the next cost-of-living adjustment.