In June, over 51 million retired-worker beneficiaries received an average Social Security check of $1,918.28, amounting to approximately $23,019 annually. While America’s premier retirement program may not make its recipients wealthy, the income it provides serves as a crucial financial foundation for most seniors.
3 months ago, national pollster Gallup conducted a survey among retirees to understand the necessity of their Social Security income in meeting their daily expenses. An overwhelming 88% of respondents indicated that their Social Security payout is either a “major” or “minor” source of income. Remarkably, over two decades of annual surveys by Gallup have consistently shown that 80% to 90% of retirees would face financial difficulties without Social Security.
Number of retirees relying on Social Security
Given that nearly nine out of ten retirees depend on their Social Security check to some extent, it’s no wonder that the cost-of-living adjustment (COLA) announcement during the second week of October is one of the most eagerly anticipated events each year.
- 88% of retirees rely on Social Security as a significant source of income.
- 80% to 90% of retirees would struggle to cover their expenses without Social Security.
The Cost-of-Living Adjustment (COLA) is a critical factor in ensuring that Social Security benefits keep pace with inflation, providing retirees with the necessary financial support to maintain their standard of living. This adjustment can significantly impact the financial well-being of millions of seniors who depend on these benefits for their day-to-day expenses.
By understanding the importance of Social Security and the role of COLA, we can better appreciate the significance of these benefits in supporting the financial stability of our retirees.
Social Security’s COLA: aim & calculation
Have you ever noticed how the prices of goods and services you buy regularly can fluctuate? This phenomenon, known as inflation when prices increase and deflation when they decrease, affects our daily lives. Social Security’s Cost-of-Living Adjustment (COLA) serves an important role in accounting for these price changes and ensuring that the income beneficiaries receive remains sufficient.
Why COLA is Important
In simple terms, COLA is designed to prevent the erosion of purchasing power for Social Security beneficiaries. If the cost of a basket of goods and services that seniors typically buy increases from one year to the next, Social Security checks should ideally rise by the same percentage. This ensures that beneficiaries can maintain their standard of living despite rising prices.
Historical Background of COLA
Before 1975, the process for cost-of-living adjustments was quite arbitrary. Adjustments were made sporadically through special sessions of Congress, and there were no adjustments at all during the 1940s. This lack of consistency often left beneficiaries vulnerable to inflation without any corresponding increase in their Social Security benefits.
How COLA is Calculated
Today, COLA is calculated based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the previous year to the third quarter of the current year. This method ensures a systematic and fair approach to adjusting benefits.
- Inflation: The general increase in prices and fall in the purchasing value of money.
- Deflation: The reduction of the general level of prices in an economy.
- Purchasing Power: The financial ability to buy products and services.
Understanding how COLA works can help you better appreciate the efforts made to ensure that Social Security benefits keep pace with the cost of living. It’s a crucial mechanism that protects the financial well-being of millions of Americans.
Starting in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the official measure for calculating annual Cost-of-Living Adjustments (COLAs) for Social Security. The CPI-W encompasses eight major spending categories, each with numerous subcategories, all possessing unique weightings.
Understanding the CPI-W
These individual weightings enable the CPI-W to be distilled into a single figure each month. This figure can be compared to previous months or years to assess whether inflation or deflation has occurred.
How is the Cost-of-Living Adjustment (COLA) Calculated?
Calculating Social Security’s cost-of-living adjustment (COLA) is straightforward:
- The average trailing 12-month CPI-W reading from the third quarter of the current year (July through September) is taken.
- This average is then compared to the average CPI-W reading from the third quarter of the previous year.
- If the average reading has increased, it indicates inflation, resulting in a higher benefit for beneficiaries in the coming year.
This process ensures that Social Security benefits keep pace with rising costs, providing financial security to those who rely on it.
For those who are curious, the percentage difference in the average third-quarter CPI-W reading from one year to the next, rounded to the nearest tenth of a percent, determines the COLA for the upcoming year.
US Inflation Rate Chart
Social Security’s cost-of-living adjustment (COLA) last did this in 1993.
Although we don’t have any of the CPI-W readings that count toward the 2025 COLA calculation as of yet, the year-over-year CPI-W readings through May 2024 offer significant clues as to what’s to come. In particular, the CPI-W readings suggest Social Security’s COLA is on pace to do something that no one has witnessed since 1993.
Recent CPI-W Trends
In mid-June, the U.S. Bureau of Labor Statistics released the May inflation report, which showed that the CPI-W had risen by 3.3% on a trailing-12-month basis. This was down a tenth of a percent from 3.4% in the April inflation report. (Note: This article was written before the release of the June inflation report on July 11.)
These trends indicate that the Social Security COLA for 2025 could potentially match a historical pattern not seen in decades, making it an exciting time for those dependent on these adjustments.
Despite a slight moderation in the prevailing inflation rate in May, there’s an intriguing forecast suggesting that Social Security’s cost-of-living adjustment (COLA) for 2025 could be historic.
Potential for a Historic COLA in 2025
According to Mary Johnson, an independent Social Security and Medicare policy analyst who formerly worked with The Senior Citizens League, the 2025 COLA is projected to be around 3%. This prediction is noteworthy given Social Security’s COLA history over the past two decades.
Understanding the Significance of a 3% COLA
To put this into perspective, a 3% cost-of-living adjustment is a significant event. Since 2010, there have been three years with no COLA at all (2010, 2011, and 2016) and one year with the smallest COLA on record (0.3% in 2017).
Recent Trends in Social Security Adjustments
Over the past three years, Social Security’s COLAs have exceeded the two-decade average of 2.6%. Here’s a snapshot:
- 2022: 5.9% increase
- 2023: 8.7% increase
- 2024: 3.2% increase
- 2025: projection of 2.63% increase
Remarkably, the 8.7% increase in 2023 was the largest since 1982 and marked the biggest nominal-dollar boost to Social Security benefits since the program began.
As we look ahead to 2025, the potential for a 3% COLA underscores the importance of staying informed about these adjustments, which can significantly impact the financial well-being of beneficiaries.
Where things get truly historic is if Johnson’s 3% COLA estimate proves accurate. If this happens, it would be the first time in 32 years that four consecutive COLAs have totaled at least 3%. For context, COLAs from 1988 through 1993 ranged from 3% to 5.4%.
Potential Financial Impact
In dollar terms, a 3% cost-of-living adjustment would increase the average retired-worker benefit by about $57 per month in 2025. Meanwhile, workers with disabilities and survivor beneficiaries would see their monthly payouts rise by an average of $46 and $45, respectively.
Retirees Continue to Face Challenges
On paper, you might think that four straight years of above-average COLAs would have retirees sitting comfortably. However, this couldn’t be further from the truth.
In May of last year, when The Senior Citizens League issued its 2024 COLA guidance, it also released a study comparing cumulative COLAs since the start of the 21st century to price changes in a broad basket of goods and services regularly purchased by seniors. While aggregate COLAs between January 2000 and February 2023 increased benefits by 78%, the prices for dozens of goods and services that retirees typically buy collectively rose by a staggering 141.4%.
Discrepancy Between COLAs and Actual Costs
This discrepancy starkly highlights the ongoing financial challenges faced by retirees. Despite the seemingly positive news of higher COLAs, the reality is that the cost of living for seniors has outpaced their benefit increases significantly.
- Average retired-worker benefit increase: $57 per month
- Workers with disabilities benefit increase: $46 per month
- Survivor beneficiaries’ benefit increase: $45 per month
Understanding the true impact of these adjustments is crucial for retirees as they navigate their financial future. While a 3% COLA is historically significant, it is essential to recognize the broader economic context in which these increases occur.
The latest analysis from The Senior Citizens League reveals a startling truth: Social Security income has lost a staggering 36% of its purchasing power since the beginning of this century. A recent report shows that there has been a loss of buying power of about 20% since 2010.
The Core Issue: Inflation Impact on Seniors
The primary concern is that the factors driving the current inflation rate are directly tied to the expenses that are most crucial for seniors. Unlike the average working American, seniors allocate a significantly larger portion of their monthly budget to shelter and medical care.
Shelter: A Major Contributor to CPI-W
Shelter holds the largest weighting in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) compared to any other category. The Federal Reserve’s aggressive rate-hiking cycle, the most intense in four decades, has resulted in soaring mortgage rates and a dramatic slowdown in existing home sales. Consequently, rent inflation has remained persistently high, further elevating the CPI-W.
Medical Services: A Rising Concern
In recent months, we’ve observed a resurgence in the inflation rate for medical services, adding another layer of financial strain for seniors.
In summary, the combination of rising costs for shelter and medical care means that the purchasing power of Social Security income continues to erode, significantly impacting the financial well-being of seniors.
Key Points to Remember:
- Social Security income has lost 20% of its purchasing power since 2010.
- Seniors spend a larger portion of their budget on shelter and medical care compared to average working Americans.
- The Federal Reserve’s rate hikes have increased mortgage rates and slowed home sales.
- Rent inflation remains high, boosting the CPI-W.
- Medical services inflation is on the rise again.
Retirees hoping for a significant boost from Social Security’s 2025 cost-of-living adjustment (COLA) might be disappointed. Even if the adjustment reaches 3% or slightly higher, it will likely fall short of countering the current inflation rates. In essence, retirees might face yet another year where the increase is insufficient to meet rising costs.
