of social security The program has several Important changes Every year, cost-of-living adjustments are made to keep benefits in line with prices and wages, but the most anticipated is the Cost of Living Adjustment (COLA). The COLA is supposed to compensate Social Security recipients for the purchasing power lost in their benefits from the previous year. But there are doubts about whether the COLA really serves that purpose.
For example, according to the Senior Citizens League, two-thirds of seniors surveyed said their 2024 COLA would not cover the increases in household expenses that occurred last year. Similarly, according to the Employee Benefits Institute, half of retirees surveyed are concerned that they will need to make significant spending cuts to keep up with inflation.
These statistics show that the purchasing power of Social Security benefits has been lost. Unfortunately, the latest 2025 COLA projections suggest that the situation could get even worse next year. Here’s what you need to know.
Social Security benefits (still) expected to have a 2.6% COLA in 2025
Social Security benefits will receive a cost-of-living adjustment in 2025. The amount of that cost-of-living adjustment will be determined by the change in the inflation rate in the third quarter (July-September) of 2024. In this scenario, inflation is measured using a subset of the Consumer Price Index called the CPI-W.
The Social Security Administration can’t calculate the 2025 COLA until September CPI-W data is available in early October. In the meantime, the situation can be clarified by the Senior Citizens League (TSCL), a nonprofit advocacy group that, among other activities, monitors monthly CPI-W data to forecast upcoming COLAs.
On July 11, TSCL updated its COLA forecast following the release of the June CPI-W data. Social Security benefits are now expected to increase 2.63% next year, up from the previous forecast of 2.57%. While that may sound like an improvement, the numbers are essentially the same; the COLA is rounded up to the nearest tenth of a percent, so both numbers equal 2.6%.
With that in mind, if Social Security recipients actually receive the 2.6% COLA next year, the average benefit for retired workers would increase by about $49.77 per month ($597.24 per year), and the average benefit for spouses would increase by about $23.63 per month ($283.56 per year).
Social Security benefits on pace to lose purchasing power by 2025
The CPI-W measures inflation based on the spending habits of hourly workers, which some policy experts see as problematic: The labor force tends to be younger than Social Security recipients (many of whom are retired), and young people spend their money differently than older people.
Retired workers generally spend more on housing and health care and less on transportation and education. These discrepancies make the CPI-W a poor indicator of inflation for Social Security COLAs. Joel Escovites, senior director of Social Security at AARP, says the Consumer Price Index for Elderly (CPI-E) is a better indicator for calculating COLAs.
The CPI-E measures inflation based on the spending habits of individuals age 62 and older, with an emphasis on areas like housing and health care. The CPI-E typically outperforms the CPI-W by 0.2% each year. In other words, assuming the CPI-E is a truly good inflation gauge for Social Security recipients, COLAs tend to be 0.2% too low, meaning that benefits are losing purchasing power over time.
Unfortunately, this trend has become even more pronounced in 2024. The table below shows the changes in the CPI-E and CPI-W for each month so far this year.
|
Month |
CPI-E Inflation |
CPI-W Inflation |
|---|---|---|
|
January |
3.5% |
2.9% |
|
February |
3.4% |
3.1% |
|
march |
3.7% |
3.5% |
|
April |
3.6% |
3.4% |
|
May |
3.6% |
3.3% |
|
June |
3.3% |
2.9% |
|
average |
3.5% |
3.2% |
Data source: U.S. Bureau of Labor Statistics.
As shown in the chart above, CPI-E inflation has exceeded CPI-W inflation by 0.3 percentage points so far this year, meaning the 2025 COLA is on pace to underestimate inflation by a larger percentage point than usual, resulting in next year’s benefits losing more-than-average purchasing power.
Remember, TSCL projects next year’s COLA to be 2.6%. This estimate is based on CPI-W inflation, but the chart above shows that the COLA would need to be one-third of 1% higher to keep up with CPI-E inflation. The difference between a 2.6% COLA and a 2.9% COLA isn’t a huge amount of money (about $6 per month for retired workers and $3 per month for spouses), but every dollar is a lot, and lost purchasing power adds up over time.
Moreover, the latest COLA projections are especially grim as the gap between the CPI-E and CPI-W has widened for a second consecutive month. If this trend continues, the 2025 COLAs could underestimate inflation by even more than 0.3% of 1%, further reducing the purchasing power of benefits.
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Social Security cost-of-living adjustment (COLA) projections have been updated for 2025. The outlook for retirees remains grim. Originally published on The Motley Fool
