The purchasing power of a Social Security dollar simply isn’t what it used to be. For most retired Americans, retirement benefits aren’t just monthly checks. It’s a vital source of income that many would find difficult to live without. Even though the average payout in May was only $1,916.63 for Social Security’s roughly 51 million retired-worker beneficiaries, a staggering 88% of surveyed retirees in Gallup’s 2024 poll stated that their Social Security benefit makes up a “major” or “minor” part of their income.
In other words, nearly nine out of ten current retirees depend on America’s leading social program to make ends meet. This reliance underscores the importance of Social Security in the lives of so many.
Given how crucial Social Security income is for existing retirees, it’s no surprise that one of the most anticipated announcements of the year is the cost-of-living adjustment (COLA). This announcement, which occurs during the second week of October, is eagerly awaited by many.
Understanding the significance of these adjustments and how they affect your finances can help you better plan for the future. Stay informed and stay prepared because Social Security remains a cornerstone of financial stability for millions of Americans.
Unfortunately, this year’s COLA reveal is shaping up to be a lose-lose situation for retirees.
Understanding Social Security’s Cost-of-Living Adjustment (COLA)
What exactly is Social Security’s cost-of-living adjustment (COLA), and why does it matter so much?
In simple terms, Social Security’s “COLA” is the mechanism that allows the program to account for price changes in a broad basket of goods and services. We refer to these changes as inflation (rising prices) or deflation (falling prices).
How COLA Affects Retirees
For instance, if the prices of various goods and services that seniors regularly purchase increase, Social Security checks should ideally rise by the same percentage. This adjustment ensures that beneficiaries don’t lose purchasing power. Essentially, Social Security’s COLA is a tracking tool that aims to keep benefits on par with inflation.
The History of Social Security’s COLA
In the early days of Social Security (1940-1974), benefit hikes were passed along arbitrarily by special sessions of Congress. This made the process inconsistent and unpredictable for retirees.
After no Cost-of-Living Adjustments (COLAs) were issued throughout the entire 1940s, a total of 11 benefit adjustments were implemented between 1950 and 1974.
The Introduction of the CPI-W and Annual COLAs
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the standard measure of inflation used for Social Security. This shift allowed for COLAs to be passed along on an annual basis. The CPI-W encompasses more than half a dozen major spending categories and numerous subcategories, each with its own respective weighting. These weightings enable the CPI-W to be condensed into a single figure each month, making it straightforward to determine if inflation or deflation is occurring.
Understanding the Calculation of Social Security’s COLA
To calculate Social Security’s cost-of-living adjustment, the trailing 12-month (TTM) CPI-W readings from the third quarter (July through September) of the current year are compared to TTM readings from the same period in the previous year.
- First, gather the TTM CPI-W readings from July to September of the current year.
- Next, gather the TTM CPI-W readings from the same period in the previous year.
- Compare these two sets of data to determine the percentage change.
This method ensures that adjustments accurately reflect the changes in the cost of living, providing beneficiaries with a fair and consistent increase that matches inflation trends.
Are you curious about the future of Social Security’s cost-of-living adjustments (COLA)? Let’s dive into how inflation impacts your benefits and what the outlook is for 2025.
Understanding Social Security’s COLA
If the average third-quarter CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) reading is higher in the current year than in the previous year, it indicates inflation. As a result, beneficiaries will receive a larger benefit in the upcoming year.
The Calculation of COLA
The magnitude of this “raise” is determined by the year-over-year percentage increase in average third-quarter CPI-W readings, rounded to the nearest tenth of a percent. It’s that simple.
What’s in Store for Social Security’s 2025 COLA?
Although the trailing twelve months (TTM) CPI-W readings from the other nine months of the year aren’t factored into the COLA calculation, they do provide valuable clues about future trends.
In each of the three previous years, Social Security’s cost-of-living adjustment has significantly exceeded the two-decade average of 2.6%. For 2022, 2023, and 2024, program recipients saw their respective Social Security checks increase by:
- 5.9% in 2022
- 8.7% in 2023
- 6.8% in 2024
As we look ahead to 2025, keep an eye on those CPI-W readings. They will provide essential insights into how your benefits might change in the coming year.
Stay informed and prepare for what the future holds for Social Security’s COLA!
In 2023, Social Security beneficiaries witnessed a remarkable change. With an increase of 8.7%, it was the largest raise in benefits in 41 years!
Looking Ahead: COLA Estimates for 2025
Based on the latest data from the U.S. Bureau of Labor Statistics’ (BLS) May inflation report, projections for the 2025 Cost-of-Living Adjustment (COLA) are aligning with, or slightly above, the two-decade average.
Revised Projections from Key Analysts
The nonpartisan senior advocacy group, The Senior Citizens League (TSCL), has modestly adjusted its forecast for Social Security’s 2025 COLA. Initially predicting a 2.66% increase, they have now revised this figure to 2.57% (rounded to 2.6%) after evaluating the May inflation data.
Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who once collaborated with TSCL before her retirement, also updated her estimate. Following the BLS inflation report for May, she reduced her forecast for next year’s COLA from 3.2% to 3%.
Impact on Beneficiaries
Though these cost-of-living adjustments (COLA) may seem minor, they hold significant importance for beneficiaries. Should these estimates prove accurate, a COLA ranging from 2.6% to 3% would translate to an additional $50 to $57 per month for the average retired-worker beneficiary in 2025.
This increase, though modest, helps to ensure that retirees can better keep up with inflation and maintain their purchasing power. Stay tuned for more updates as we continue to monitor these crucial adjustments.
Additionally, a Social Security COLA of 2.6% to 3% would result in a monthly benefit increase of $40 to $46 for workers with disabilities, and a $39 to $45 monthly boost for survivor beneficiaries.
A Lose-Lose Scenario Likely Awaits Social Security’s Seniors in 2025
Statistically, it’s been 28 years since Social Security’s COLA has come in at or above 2.6% for four consecutive years. On a nominal dollar basis, an estimated COLA ranging from 2.6% to 3% in 2025 would appear to be a win for retirees. However, looks can be deceiving.
Why a Higher COLA Might Not Be a Win
Following slightly cooler-than-expected core inflation in May—core inflation removes food and energy costs from the equation—COLA estimates from TSCL and Mary Johnson declined modestly. If this cooling pattern were to persist, the expected cost-of-living adjustment for 2025 would likely taper.
- Core Inflation: Excludes volatile food and energy prices, providing a clearer picture of long-term inflation trends.
- COLA Estimates: Adjustments are made based on inflation data, which can fluctuate.
- Potential Tapering: If inflation continues to cool, the projected increase in benefits may be lower than initially anticipated.
In conclusion, while a 2.6% to 3% COLA may seem promising, the reality could be less favorable for Social Security’s seniors due to the complexities of inflation and its impact on benefit adjustments.
The challenge for seniors today is that they’ve been enduring inadequate Cost-of-Living Adjustments (COLAs) for much of this century.
A Deep Dive into Subpar COLAs
In May 2023, the Senior Citizens League (TSCL) released a compelling report that compared the total Social Security COLAs from January 2000 to February 2023 with the price changes for a basket of dozens of goods and services typically purchased by retirees during the same period. While Social Security’s COLAs had risen by a cumulative 78%, the cost of these goods and services had surged by a staggering 141.4%!
The Impact on Purchasing Power
This significant disparity has resulted in a 36% loss of purchasing power for Social Security income since 2000. This ongoing issue has left many seniors struggling to make ends meet as their benefits fail to keep pace with rising costs.
A Potential New Challenge in 2025
But here’s the kicker: Seniors might face another blow if the 2025 Social Security COLA exceeds expectations.
Should inflation pick up again between July and September, driving the 2025 cost-of-living adjustment higher, two specific expenses are likely to be the main culprits:
- Shelter
- Medical care services
These two categories are essential and often unavoidable, making it even more crucial for adjustments to accurately reflect the real-world expenses retirees face.
As we move forward, it’s important for policymakers to consider these factors to ensure that Social Security benefits truly meet the needs of our senior citizens.