In April, close to 51 million retired-worker beneficiaries received an average Social Security check of $1,915.26. While this amount may not be transformative, Social Security benefits have proven to be essential for the financial stability of most retirees.
In 2022, Social Security benefits lifted approximately 16.5 million seniors aged 65 and over out of poverty. Additionally, a national poll conducted by Gallup in April revealed that Social Security represented a “major” or “minor” source of income for 88% of the retirees surveyed. Given how critical this income is to the financial well-being of retirees, attention is now focusing on the upcoming 2025 cost-of-living adjustment (COLA).
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The History of COLA Adjustments
Simply put, the cost-of-living adjustment (COLA) is a tool used by the Social Security Administration (SSA) to account for changes in the price of goods and services. This adjustment ensures that the purchasing power of Social Security benefits keeps pace with inflation.
Here are some key reasons why COLA is crucial:
- Maintains Purchasing Power: COLA adjustments help retirees maintain their standard of living by ensuring their benefits keep up with rising costs.
- Reduces Poverty Risk: By adjusting benefits for inflation, COLA helps prevent seniors from falling into poverty.
- Economic Stability: Consistent adjustments contribute to the overall economic stability of retirees, allowing them to manage their expenses more effectively.
As we look ahead to 2025, the significance of COLA cannot be overstated. This adjustment will play a pivotal role in the financial health of millions of retirees, making it a focal point of interest and concern.
Imagine if the price of a broad basket of goods and services that seniors typically purchase increases from one year to the next. In an ideal world, Social Security benefits would rise by the same amount to ensure that there is no loss in purchasing power. This is precisely what Social Security’s Cost-of-Living Adjustment (COLA) aims to achieve.
Before 1975, cost-of-living adjustments were completely arbitrary and were enacted by special sessions of Congress. In fact, between 1940 and 1975, only 11 benefit increases were approved, and none were administered during the entire 1940s.
A Significant Change in 1975
Everything changed in 1975. For nearly the last half-century, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been used as the annual measure of inflation for the program. The CPI-W includes more than half a dozen major spending categories and numerous subcategories, each with its own specific weighting.
Understanding the CPI-W
The CPI-W is a comprehensive tool designed to track inflation effectively. It encompasses:
- Major spending categories
- Multiple subcategories
- Specific weightings for each category
By using the CPI-W, Social Security aims to adjust benefits in a way that keeps up with the rising costs of goods and services that seniors rely on, ensuring that they maintain their purchasing power year after year.
In summary, the Cost-of-Living Adjustment is a crucial element of Social Security, designed to protect seniors from inflation. Understanding its history and how it’s calculated can help us appreciate the importance of maintaining this adjustment for future stability and financial security.
Understanding how the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) influences Social Security’s Cost-of-Living Adjustment (COLA) is crucial for many beneficiaries. This single figure, reported each month, allows for easy comparisons to previous months or the prior year, helping to determine if inflation (rising prices) or deflation (falling prices) has occurred.
The Unique Calculation of Social Security’s COLA
Social Security’s COLA calculation is distinct in that it relies exclusively on the CPI-W readings from the third quarter (July through September). These readings are pivotal because, while the data from the other nine months can indicate price trends, they are not used by the Social Security Administration (SSA) to determine the COLA for the upcoming year.
How the CPI-W Influences COLA
Simply put, if the average CPI-W reading from the third quarter of the current year exceeds the average CPI-W reading during the same period of the previous year, it signifies inflation. Consequently, beneficiaries are entitled to a larger payout. The year-over-year percentage change in these average third-quarter CPI-W readings, rounded to the nearest tenth of a percent, directly impacts the increase in Social Security checks for the next year.
Key Points to Remember
- The CPI-W is crucial for determining the COLA.
- Only third-quarter readings (July through September) are used in the calculation.
- Price trends from the other months are not considered in the COLA determination.
- Increased average third-quarter CPI-W readings from one year to the next result in higher Social Security payouts.
- The percentage change is rounded to the nearest tenth of a percent to determine the payout increase.
Understanding these nuances can help beneficiaries better anticipate changes in their Social Security benefits and plan accordingly. By focusing on the third-quarter CPI-W readings, the SSA ensures that adjustments reflect the most current and relevant economic conditions.
Over the past three years, Social Security beneficiaries have experienced significant increases in their monthly checks. These cost-of-living adjustments (COLA) have been 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. For perspective, the average COLA over the last two decades has been 2.6%. As we look ahead to 2025, beneficiaries are optimistic about another above-average increase.
US Inflation Report Provides Insight
On May 15, the U.S. Bureau of Labor Statistics released its eagerly awaited April inflation report, providing valuable insights into the direction of collective prices. According to the report, the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) rose by 3.4% over the past 12 months. This figure is still significantly higher than the Federal Reserve’s long-term inflation target of 2%.
Impact of Core Inflation
One of the driving factors behind this persistent inflation is core inflation, which excludes volatile food and energy costs. Due to the stubbornly high core inflation, the nonpartisan senior advocacy group, The Senior Citizens League (TSCL), has once again revised its long-term forecast for Social Security’s 2025 COLA.
Looking Ahead to 2025
Given the recent trends and the latest inflation data, beneficiaries are hopeful for another substantial boost to their checks in 2025. Here are some key points to consider:
- Historical Context: The average COLA over the last 20 years has been 2.6%.
- Recent Increases: COLA adjustments have been 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024.
- Inflation Rates: The CPI-W increased by 3.4% over the last 12 months.
- Core Inflation: Persistent high core inflation has influenced future COLA forecasts.
As we continue to monitor economic indicators and inflation reports, it’s clear that Social Security beneficiaries are poised for potentially another above-average COLA increase in 2025. Stay tuned for more updates as we approach the new year.
Although we still haven’t reached the months that actually matter in the COLA calculation, TSCL believes the 2025 COLA will come in at 2.66%, which would round up to 2.7%. If accurate, this would (barely) mark a fourth consecutive year of above-average COLAs for beneficiaries.
How a 2.7% COLA Could Affect Your Social Security Checks
It’s one thing to see a percentage forecast on paper and an entirely different beast to understand how that percentage can tangibly impact Social Security checks. With the understanding that COLA forecasts are still fluid, let’s take a closer look at exactly how much a 2.7% cost-of-living adjustment could increase Social Security checks in 2025.
The Impact on Retired Workers
For retired workers, who I noted earlier brought home an average check of $1,915.26 in April, a 2.7% COLA would translate into a $52 monthly increase next year. In short, the average retired-worker beneficiary would be bringing home about $1,967 each month, if this prognostication proves accurate.
Breaking Down the Numbers
To put it into perspective, here’s a simple breakdown:
- Current Average Check: $1,915.26
- Projected Increase: 2.7%
- Monthly Increase: $52
- New Average Check: $1,967
While a $52 increase might not seem substantial, over a year, it adds up to an additional $624. For many retirees, every dollar counts, and this increase can help cover rising costs in essentials.
What This Means for You
As we await the official numbers, it’s important to stay informed about how potential changes in COLA can affect your finances. Even a seemingly small percentage increase can make a significant difference over time.
Stay tuned for more updates and prepare to adjust your budget accordingly to maximize the benefits of the upcoming COLA adjustments.
Workers with disabilities and survivor beneficiaries are set to see significant increases in their monthly payouts. Specifically, the approximately 7.25 million workers with disabilities who received benefit checks in April will experience an average increase of $42, bringing their monthly payouts to about $1,579. Similarly, the 5.8 million survivor beneficiaries can expect their monthly checks to rise by an average of $41, reaching approximately $1,544.
Keep the Champagne on Ice
Although it seems likely that Social Security recipients will enjoy a fourth consecutive year of above-average cost-of-living adjustments (COLA), the 2025 COLA may not be a reason to celebrate. While higher inflation rates are expected to increase benefits, the costs that matter most to seniors are rising even faster.
Rising Costs for Seniors
For instance, seniors allocate a larger portion of their monthly expenditures to shelter expenses and medical-care services compared to the typical working-age American. This means that even with a boost in benefits, many seniors may still find it challenging to keep up with the increasing costs of living.
- Shelter expenses: Housing costs have been climbing steadily, impacting seniors more significantly as they often live on fixed incomes.
- Medical-care services: Healthcare costs are another substantial burden, with seniors requiring more frequent and specialized medical attention.
So, while the anticipated increase in Social Security benefits is a step in the right direction, it’s important to remain cautious and realistic about the financial challenges that lie ahead for our senior citizens.
In recent times, higher mortgage rates have brought the housing market to a virtual standstill. This has resulted in shelter inflation remaining stubbornly high, hitting 5.5% over the last 12 months, as per the Consumer Price Index for All Urban Consumers (CPI-U). Even a slightly above-average Cost of Living Adjustment (COLA) isn’t likely to make a significant impact if shelter inflation continues to stay well above historical norms.
The Impact of Shelter Inflation
Shelter inflation has been a major concern, especially for seniors who rely on Social Security. The continuous rise in shelter costs means that even with adjustments in COLA, many find it challenging to keep up with their living expenses. This inflationary pressure on shelter costs significantly affects the overall cost of living, making it harder for people to manage their finances effectively.
Medical-Care Services Inflation
Similarly, inflation in medical-care services has picked back up over the last six months. It currently shows an increase of 2.7% over the trailing 12-month period. This rise in medical-care costs adds another layer of financial strain, particularly on seniors who often have higher healthcare needs.
The Economic Outlook for Seniors
The rate at which shelter and medical-care services are increasing suggests that seniors, who constitute roughly 86% of Social Security’s beneficiaries, will see the purchasing power of their Social Security dollars decline in 2025. According to a TSCL study from May 2023, the purchasing power of a Social Security dollar has plunged by 36% between January 2000 and February 2023.
Key Points to Consider
- Shelter inflation remains significantly high at 5.5% based on CPI-U.
- Medical-care services inflation has increased by 2.7% over the last year.
- The purchasing power of Social Security dollars has decreased by 36% from 2000 to 2023.
- Seniors, making up the majority of Social Security beneficiaries, are the most affected by these inflationary trends.
As we look ahead, it’s clear that addressing these inflationary pressures is crucial for ensuring that seniors can maintain their standard of living. Policymakers and financial planners need to take these factors into account to better support our aging population.
It’s a challenging reality that there’s no straightforward solution to the persistent loss of purchasing power affecting the majority of Social Security beneficiaries. The CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) is fundamentally flawed as it prioritizes the spending habits of working-age Americans. These individuals often do not receive Social Security checks and have vastly different spending patterns compared to seniors. Without legislative changes on Capitol Hill, Social Security beneficiaries are likely to face continued disappointment, especially with the 2025 Cost-of-Living Adjustment (COLA) on the horizon.