When most Americans reach retirement age, they become reliant, in some capacity, on their Social Security income. Over the previous 22 years, annual surveys from national pollster Gallup have found that between 80% and 90% of then-retired workers lean on their monthly benefit as a "major" or "minor" source of income.
Considering how vital Social Security income is to the financial well-being of our nation's aging workforce, it should come as no surprise that the cost-of-living adjustment (COLA) announcement from the Social Security Administration in October is the most anticipated event of the year for many seniors.
While signs continue to point to a beefier Social Security check for the program's more than 67 million beneficiaries in 2025, seniors have a legitimate reason to not be happy.
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What is Social Security's cost-of-living adjustment (COLA) and how is it calculated?
The fabled Social Security "COLA" you often read about in the news is the program's mechanism for keeping up with inflation. If the prices of the goods and services that seniors regularly buy increase from one year to the next, Social Security benefits should, ideally, rise by a commensurate amount to ensure no loss of purchasing power. COLA is simply that measure designed to keep benefits on par with inflation.
Before 1975, COLAs were arbitrarily passed along at random intervals by special sessions of Congress. There wasn't a single COLA during the 1940s, and 11 adjustments were made from 1950 through 1974.
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the program's annual inflation-measuring stick. The CPI-W has over a half-dozen major spending categories and a long list of subcategories, all of which have their own respective weightings. The purpose of these individual weightings is to allow the CPI-W to be whittled down to a single figure. This allows for simple month-to-month and year-over-year comparisons to determine whether a broad basket of goods and services has risen or declined in price.
Only CPI-W readings from the third quarter (July through September) are used to calculate Social Security's COLA. While the other nine months can help identify inflationary/deflationary trends, they won't be used in the final COLA calculation.
If the average CPI-W reading from the third quarter (Q3) of the current year rises from the average CPI-W reading from Q3 of the previous year, beneficiaries will receive a larger payout in the following year. The amount of the increase is simply the year-over-year percentage difference in average Q3 CPI-W readings, rounded to the nearest tenth of a percent.
In the unlikely event that prices decline (deflation) from one year to the next, which has only occurred three times since 1975, benefits remain unchanged in the following year.
A modest reacceleration in the prevailing inflation rate could equate to an even larger Social Security check in 2025. US Inflation Rate data by YCharts.
Good news: Social Security checks are forecast to rise by more than initially expected
Over the last three years, Social Security beneficiaries have enjoyed above-average cost-of-living adjustments of 5.9% (for 2022), 8.7% (for 2023), and 3.2% (for 2024). This compares to an average COLA of 2.6% over the last 20 years.
Following the release of the January inflation report in February, non-partisan senior advocacy group The Senior Citizens League (TSCL) updated its long-term Social Security COLA forecast for 2025 to 1.75%. Believe it or not, this was actually an increase from the 1.4% COLA they had forecast for 2025 in the previous month.
But things have continued to improve as new inflation reports from the Bureau of Labor Statistics have been released.
The March inflation report, released on April 10, pointed to a modest reacceleration in the prevailing rate of inflation over the trailing 12-month period. With the CPI-W increasing by 3.5% over the previous year, TSCL, once again, updated its long-term forecast COLA for 2025 to (drum roll) 2.6% -- the average COLA over the last two decades.
In just a three-month stretch, estimates for the 2025 Social Security COLA have nearly doubled.
What would a 2.6% cost-of-living adjustment translate to in nominal dollars? Based on the $1,913.31 check the average retired-worker beneficiary took home in March, a 2.6% COLA would boost their benefit by just shy of $50 per month next year.
As for the nearly 7.3 million workers receiving disability benefits and the program's roughly 5.8 million survivor beneficiaries, average monthly checks would be set to climb by $40 and $39, respectively.
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Social Security's COLA continues to shortchange seniors
On paper, a steadily rising COLA forecast probably sounds like great news. Even if 2025 COLA estimates were to remain steady at 2.6% through the third quarter, it would mark the fourth consecutive year of benefit increases that were at or above average since 2004.
But if seniors dig a bit deeper into why the prevailing rate of inflation, and thus Social Security's COLA forecast, is climbing, they're not going to be happy.
The Consumer Price Index for all Urban Consumers (CPI-U) is a similar measure of inflation to the CPI-W. While the CPI-U and CPI-W both have a number of major spending categories, one in particular continues to throw a monkey wrench into things. I'm talking about shelter inflation.
"Shelter" refers to rental costs, including utility expenses, as well as owners' equivalent rent, which examines the estimated cost to rent an owners' existing home, minus utility expenses. Shelter is the single biggest weighting in the CPI-W and CPI-U. Furthermore, seniors spend a disproportionately higher percentage of their monthly budget on shelter expenses than working-age Americans.
In March, shelter inflation clocked in at a scorching-hot 5.7% on an unadjusted trailing 12-month basis in the CPI-U.
With the Federal Reserve intent on fighting inflation, interest rates have risen at their fastest pace in four decades. In turn, mortgage rates have soared from where they stood a few years ago and brought existing-home sales to a virtual standstill. There's no easy fix for what ails the housing industry, which means there's no panacea that'll bring shelter inflation down anytime soon. Even with an average or above-average COLA, the shelter inflation seniors are contending with is almost assured to cause their Social Security income to lose purchasing power in 2025.
According to TSCL, the purchasing power of a Social Security dollar has fallen by 36% between January 2000 and February 2023. Until changes are made to the CPI-W that better reflect the price challenges seniors are contending with -- seniors comprise 86% of Social Security's beneficiaries -- this loss of purchasing power is likely to worsen.
Even with Social Security's 2025 COLA forecast on the rise, seniors have little reason to be happy.
