The Social Security program in the United States is an absolutely vital pillar for the financial stability of millions of Americans, as evidenced by an analysis by the Center on Budget and Policy Priorities that reveals that it lifts 22.7 million people out of poverty every year. In addition, annual Gallup surveys, conducted over more than two decades, show that between 80% and 90% of retirees depend on their monthly Social Security payments to cover at least part of their expenses.
With more than 67 million retirement beneficiaries, Social Security is the leading retirement program in the United States, and every year one of the most anticipated events by beneficiaries is the cost of living adjustment (COLA) revealed in October by the Social Security Administration (SSA).
What Is the Social Security COLA and How Does It Work?
The Social Security COLA is a crucial mechanism that links benefits to inflation. Its objective is to ensure that benefits are properly adjusted to the rising cost of living, thus maintaining the purchasing power of the beneficiaries. For example, if the price of a basket of goods and services increases compared to the previous year, Social Security benefits should also increase to compensate for that inflation.
Prior to 1975, cost of living adjustments were arbitrary and determined by special sessions of Congress, with only 11 adjustments transmitted to beneficiaries between 1940 and 1975, none of them administered during the entire 1940s.
Since 1975, the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W) has become the primary tool for calculating the cost of living adjustment. This index evaluates a wide range of spending categories and subcategories to measure inflation, using readings from the third quarter of the current year to determine whether prices have increased or decreased compared to the previous year.
If the average CPI-W reading for the third quarter of the current year is higher than that of the previous year, beneficiaries will see an increase in their monthly payments the following year, reflecting the percentage difference year over year. On the contrary, if prices fall compared to the previous year, profits will remain unchanged for the following year.
This meticulous and specific calculation of the Social Security cost of living adjustment ensures that beneficiaries can maintain their standard of living in the face of economic fluctuations, being a vital tool for their financial well-being over time.
How Much Will Social Security Payments Raise in 2025? Two Possible Numbers
If you want to understand the COLA adjustment projections for the year 2025, you should consider the two that are already available, issued by two different organizations that usually match it every year, or get very close. In February, the Congressional Budget Office (CBO) released its Annual Economic Outlook for the Social Security Old Age and Survivors Insurance Trust Fund. In these projections, the CBO estimated that the Social Security COLA could reach 2.5% by next year.
This estimate implies that, on average, retired workers who received about $1,910.79 in February could see an increase of about $48 per month in their benefits, bringing them to $1,958.55.
On the other hand, The Senior Citizens League (TSCL), an advocacy group focused on seniors, predicted that the Social Security COLA for 2025 would be 1.75%, rounded up to 1.8%.
According to this estimate, the same average retired worker would see an increase of about $34 per month, reaching a total of $1,945.18.
Although these estimates differ, both suggest that the Social Security COLA in 2025 will be less than the 3.2% adjustment approved for this year by the SSA. This is due to a lower expected inflation rate, which would result in a more moderate increase in benefits for Social Security recipients next year.