Social Security’s 2025 Cost-of-Living Adjustment (COLA) Is Set to Do Something Unseen in 28 Years

By Ehsteem Arif

Published on:

Joe Biden

In May, 51 million retired-worker beneficiaries took home an average Social Security check of $1,916.63, which translates to about $23,000 annually. While this might not seem like a lot, the average retiree would struggle without their monthly benefit.

For over two decades, Gallup has surveyed retirees about their reliance on Social Security income. The results show that 80% to 90% of respondents rely on it as a major or minor income source, highlighting its critical role in covering expenses. Given the importance of Social Security, the annual cost-of-living adjustment (COLA) is highly anticipated by beneficiaries.

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COLA Explained

Social Security’s COLA accounts for inflation. Imagine a basket of goods and services that seniors regularly buy. If the price of these items increases, benefits should rise accordingly to maintain purchasing power. COLA is the tool that ensures benefits increase with inflation.

For 35 years after the first Social Security benefit was paid in 1940, COLAs were disbursed arbitrarily by Congress. From 1940 to 1975, only 11 adjustments were made. In 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the measure for annual inflation adjustments. The CPI-W, reported monthly by the Bureau of Labor Statistics (BLS), tracks price changes in goods and services.

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The trailing-12-month CPI-W readings from July to September determine the COLA for the upcoming year. If the average Q3 CPI-W reading is higher than the previous year’s, beneficiaries get a larger check. The percentage difference between these readings, rounded to the nearest tenth of a percent, determines the COLA.

Historical Context

For 51 million retired-worker beneficiaries, the 2025 Social Security COLA could be significant. While not set for a dramatic increase, it’s poised to achieve something last seen in 1997.

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In June, the BLS released the May inflation report, showing a 3.3% increase in the CPI-W over 12 months. This led the Senior Citizens League (TSCL) to forecast a 2.57% COLA for 2025, down from an earlier 2.66% forecast. Over the last 20 years, the average COLA has been 2.6%.

Despite recent boosts, COLAs have been inconsistent since 2000. Deflation led to no COLAs in 2010, 2011, and 2016, and the 2017 COLA was just 0.3%. Since 2000, there have been 11 years with COLAs of 2% or lower. However, recent years have seen larger increases: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. The 8.7% COLA in 2023 was the highest in 41 years.

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If TSCL’s forecast holds, a 2.6% COLA in 2025 would mean the first four-year streak of COLAs at or above 2.6% since 1997. For the average retired worker, this would mean an additional $50 per month. Disabled workers and survivor beneficiaries could expect increases of $40 and $39, respectively.

Insufficient Adjustments

While a four-year streak of decent COLAs might be celebrated, seniors continue to face challenges. In May 2023, TSCL found that from January 2000 to February 2023, aggregate COLAs increased by 78%, but the price of goods and services for seniors rose by 141.4%. This means the purchasing power of Social Security dollars has dropped by 36%.

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The CPI-W is partly to blame. It tracks spending habits of urban wage earners and clerical workers, not seniors. Seniors spend more on shelter and medical care, which have seen high inflation rates: 5.4% for shelter and 3.1% for medical care as of May 2024.

Shelter inflation remains high due to rising mortgage rates, while medical care services inflation has increased recently. The CPI-W doesn’t adequately account for these expenses, leading to a decline in Social Security’s purchasing power. A 2.6% COLA in 2025 is unlikely to change this trend significantly.

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Maximizing Social Security

If you’re behind on retirement savings, some “Social Security secrets” could boost your retirement income. For example, one trick could pay you as much as $22,924 more annually. Knowing how to maximize your Social Security benefits can help you retire with confidence.

FAQs

How is Social Security COLA calculated?

It’s based on the CPI-W from July to September.

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When was the first Social Security COLA?

It was in 1940.

What’s the forecasted COLA for 2025?

It’s estimated at 2.6%.

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How often are COLAs adjusted?

Annually, based on inflation.

What’s the average annual Social Security benefit?

Around $23,000.

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Disclaimer- We are committed to fair and transparent journalism. Our Journalists verify all details before publishing any news. For any issues with our content, please contact us via email. 

Ehsteem Arif

A tax law expert with a knack for breaking down complex regulations into digestible insights. Ehsteem's articles on the tax news blog offer invaluable guidance to readers navigating changes in tax legislation.

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