Social Security benefits are already one step away from reaching their smallest cost-of-living adjustment (COLA) in four years, and the forecast was revised downward in the month of June. Inflation has moderated over the past year, but many retired workers continue to struggle to make ends meet.
Less than 50% of retired Americans believe they have enough money and about 90% are worried that rising prices will devalue their savings, according to the 2024 US Retirement Survey by Schroders investment manager.
“Whether it’s a trip to the gas station, the supermarket or the pharmacy, prices in the United States have increased markedly in recent years, and that’s particularly challenging for retirees living on fixed income sources,” said Deb Boyden, director of U.S. Defined Contribution at Schroders.
Inflation Outpaces Social Security COLA Increases
Of course, Social Security benefits have annual COLA cost-of-living adjustments to safeguard their purchasing power as prices rise across the economy, but the Senior Citizens League notes that “Colas are increasingly unlikely to keep pace with inflation over time.” In fact, although benefits have a COLA of 3.2% in 2024, two-thirds of the retirees surveyed say that their expenses increased by more than 3.2%.
This means that Social Security benefits have lost their purchasing power this year, which explains why so many retired workers are going through financial difficulties, unfortunately, it is unlikely that the problem will have improvements next year, because Social Security benefits are in the process of having an even lower cost of living adjustment in the year 2025, below are the important details.
Social Security COLAs depend on how inflation changes in the third quarter
The cost of living adjustments are linked to inflation using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) that measures price changes based on the spending habits of hourly workers.
This may explain why Social Security payments have lowered purchasing power, retirees spend money differently than workers, so the CPI-W might not reflect the true effect of inflation on Social Security beneficiaries, for example, the CPI-W may underestimate the effect of household and medical expenses, simply because people of working age spend less on those items.
The calculation of the COLA itself is easy, the CPI-W of the third quarter, the average reading is made between the months of July and September of the current year, it is divided by the CPI-W of the third quarter of the previous year, the percentage increase, if any, becomes the COLA of next year, for example, the CPI-W of the third quarter increased by 3.2% last year, so Social Security benefits had a COLA of 3.2% this year.
