Each year, there's a big change that Social Security recipients eagerly await -- the news of a cost-of-living adjustment, or COLA. While that announcement typically comes in October, many Social Security beneficiaries spend months agonizing over how much their monthly paychecks will rise.
At the start of 2024, Social Security benefits got a 3.2% COLA. But next year's raise isn't looking as generous -- at least not so far.
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We're still months away from having an official read on 2025's Social Security COLA. But initial estimates are pointing to just a 2.57% increase.
Smaller Social Security COLAs aren't all bad news. Smaller COLAs are indicative that inflation isn't as rampant. What seniors lose in the form of a less generous COLA, they gain in the form of not seeing their grocery and gas prices rise at such a rapid clip.
Still, there's a big flaw in the way Social Security COLAs are calculated. And if lawmakers can implement changes, seniors who rely heavily on those benefits could see their financial situations vastly improve.
A big change is needed
Currently, Social Security COLAs are calculated based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). And you might recognize the flaw in the system just by reading that.
As you might imagine, the costs incurred by clerical and urban workers differ substantially from those incurred by retirees, who often spend far more money each year on healthcare than their younger counterparts. But the CPI-W doesn't account for that, and understandably so.
It's not an index that's meant to be unique to seniors. But it's also not an index that should be used to determine how much seniors' Social Security income will increase from one year to the next.
A 2023 report from the nonpartisan Senior Citizens League found that Social Security beneficiaries had lost 36% of their buying power since the year 2000. It also found that seniors aged 85 and over as of 2023 would need an extra $516.70 per month to maintain the same level of buying power as in 2000.
It's also important to note that while cooling inflation may be helping consumers (including seniors) to some degree, there's a key difference between a lower inflation rate and lower prices. A lower rate of inflation means prices aren't rising as rapidly as they once were. That doesn't mean it's gotten less expensive to fill up a car or put food on the table.
But that distinction aside, the CPI-W has proven to be a poor benchmark for calculating COLAs. So it's now up to lawmakers to do right by seniors by implementing a major change.
A senior-specific index could spell relief
Since the CPI-W is not the most accurate measure of the costs Social Security recipients face, a far better solution could be to switch over to the CPI-E, or Consumer Price Index for the Elderly, for the purpose of calculating COLAs. Doing so could result in not only higher COLAs, but ones that actually allow seniors to maintain their buying power based on the things they spend most of their money on.
So what's the problem? It could be a simple matter of the "we've always done it this way" mentality. But until lawmakers are inspired to make a change, Social Security beneficiaries might continue to struggle to maintain their buying power from one year to the next.
That's why an ideal situation is to retire with income outside of Social Security. A robust 401(k) or IRA could make it so that insufficient COLAs are less of a problem.
Unfortunately, it's too late for today's retirees to go back in time and build nest eggs they don't have. But current workers should take the fact that Social Security COLAs don't keep pace with inflation to heart -- and do what they can to save to avoid a financial crunch later in life.
