For the majority of retired Americans, Social Security is far more than just a monthly check. It serves as a vital financial lifeline during their golden years, ensuring stability and peace of mind.
Over the past 23 years, national pollster Gallup has conducted surveys to understand the extent of retirees’ reliance on this essential social program. The results are telling: between 80% and 90% of respondents consistently report that they need their Social Security check to cover at least some portion of their expenses. Notably, this includes 88% of those surveyed in April 2024.
What is Social Security’s COLA and How is it Determined?
Given the significant number of aging Americans who depend on Social Security to bolster their finances, it’s no wonder that the annual cost-of-living adjustment (COLA) announcement is eagerly awaited. This year’s unveiling is now less than two weeks away, sparking anticipation and hope among retirees.
The COLA adjustment is more than a mere percentage change; it represents the balance between financial survival and the ever-looming threat of inflation. As we approach the announcement, retirees across the nation hold their breath, hoping for an adjustment that will genuinely make a difference in their lives.
While there’s a glimmer of hope for beneficiaries, Social Security’s 2025 COLA is shaping up to be a double-edged sword for retirees.
Social Security’s Cost-of-Living Adjustment (COLA) is the “raise” beneficiaries receive most years to account for rising prices—better known as inflation. Notice that “raise” is in quotation marks to emphasize that these increases in Social Security benefits are meant to match inflation, not outpace it, like a true raise from an employer might.
Hypothetically, if the price for a broad basket of goods and services regularly purchased by retirees increases by 3.5% from one year to the next, Social Security benefits should rise by the same percentage. This adjustment ensures that retirees can continue to purchase the same quantity of goods and services. COLA is essentially the mechanism the Social Security Administration uses to prevent beneficiaries from losing buying power.
For the first 35 years after the initial mailing of retired-worker checks (from January 1940 to December 1974), adjustments to Social Security benefits were unpredictable. Throughout the entire decade of the 1940s, there were no changes to benefits, and over the next 25 years, only 11 Cost-of-Living Adjustments (COLAs) were enacted during special sessions of Congress.
Introduction of the CPI-W in 1975
In 1975, a significant change occurred. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the official measure of inflation used to determine annual COLAs for Social Security benefits. The CPI-W breaks down inflation into individual components, each with its own percentage weighting. This allows the index to be distilled into a single figure each month, making it easy to compare year-over-year changes and determine whether prices are rising (inflation) or falling (deflation).
How the CPI-W Affects COLA Calculations
Although the U.S. Bureau of Labor Statistics reports the CPI-W on a monthly basis, only the average readings from the trailing 12 months ending in July, August, and September (the third quarter) are used in the COLA calculation. If the average CPI-W for the third quarter of the current year is higher than the same period of the previous year, it indicates that prices have increased. Consequently, Social Security beneficiaries are eligible for a “raise” in the upcoming year.
The year-over-year percentage difference in the average third-quarter CPI-W readings, rounded to the nearest tenth of a percent, determines the amount of Social Security’s Cost-of-Living Adjustment (COLA) for the following year.
