For the fifth time in six years, Social Security’s cost of living adjustment (COLA) will leave beneficiaries dissatisfied. Despite a possible fourth consecutive year with an above-average COLA in 2025, retirees continue to face a significant loss of their purchasing power.
In May of this year, more than 51 million retired workers received an average Social Security benefit of $1,916.63, equivalent to about $23,000 annually. While these payments don’t make anyone a millionaire, they have historically been crucial to the financial stability of America’s aging workforce.
Social Security Helps Take People Out of Poverty
An analysis by the Center on Budget and Policy Priorities reveals that in 2022, the Social Security program lifted 22.7 million people out of poverty, including 16.5 million adults over the age of 65. Additionally, Gallup surveys for 23 consecutive years have shown that between 80% and 90% of retirees rely on their Social Security income to cover at least part of their expenses.
Given the importance of this income for millions of individuals, beneficiaries eagerly await the annual cost-of-living adjustment disclosure, because this means more cash in their pockets.
Although the 2025 COLA is expected to achieve something unprecedented in 28 years, it is also destined to disappoint retirees who are most dependent on the program.
The Secret Formula to Get the COLA Adjustment
The Social Security COLA adjusts benefits based on changes in the prices of goods and services. If the price of a basket of goods and services increases, in theory, Social Security checks should increase in the same proportion to maintain purchasing power.
Since its inception in 1940, the calculation of the COLA has varied significantly. For the first 35 years, the adjustments were arbitrary and approved by Congress.
Since 1975, the Consumer Price Index for Urban Wage Earners and Administrative Workers (CPI-W) has been used to calculate the annual COLA. This index condenses various categories of spending into a single monthly figure, allowing year-on-year comparisons to determine inflation or deflation.
The calculation of the Social Security COLA is based exclusively on the CPI-W readings for the third quarter (July-September). If the average reading for the third quarter of the current year is higher than that of the previous year, inflation has occurred and beneficiaries receive a proportional increase.
Expectations for the 2025 COLA
After three years with above-average adjustments, beneficiaries expect this trend to continue. In 2022, 2023 and 2024, the colas were 5.9%, 8.7% and 3.2% respectively, exceeding the average of the last two decades of 2.6%.
Although there are still crucial months left for the calculation of the COLA, the monthly CPI-W gives indications of what could be coming. According to the U.S. Bureau of Labor Statistics. USA., The Senior Citizens League (TSCL) anticipates a COLA of 2.57% (rounded to 2.6%) by 2025. Mary Johnson, an independent policy analyst, estimates a TAIL of 3%. If these predictions come true, 2025 would be the fourth consecutive year with a minimum TAIL of 2.6%, a rarity since 1997.
