For most retired Americans, a Social Security check isn't just a piece of paper. It's a financial lifeline that's necessary to make ends meet.
Even though the average Social Security retired-worker benefit was "only" $1,916.63 in May 2024, America's leading retirement program was responsible for pulling 22.7 million people out of poverty in 2022, according to an analysis from the Center on Budget and Policy Priorities. And 16.5 million of them were adults aged 65 and over.
Furthermore, only 11% of retirees aren't reliant on their Social Security income to cover their expenses, based on an April survey by national pollster Gallup.
With Social Security representing a financial foundation for tens of millions of Americans each year, it should come as no surprise that the cost-of-living adjustment (COLA), which is revealed during the second week of October, is the most-awaited announcement each year. While estimates for the 2025 COLA are starting to come into focus, the end result is unlikely to appease retirees.
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What is Social Security's COLA, and how is it calculated?
The price of the things we buy will change over time. Social Security's cost-of-living adjustment is the mechanism that accounts for these price changes.
For example, if the price for a basket of goods and services that seniors typically purchase rises, Social Security benefits should, in a perfect world, increase by the exact same percentage to ensure recipients don't lose any purchasing power. The COLA is the tool that accounts for annual inflation (rising prices) and deflation (declining prices).
Prior to 1975, Social Security had no inflationary tether. Rather, special sessions of Congress arbitrarily passed along benefit increases from time to time. There wasn't a single adjustment made in the entirety of the 1940s, but 11 COLAs were enacted from 1950 through 1974.
Beginning in 1975, the Consumer Price for Index for Urban Wage Earners and Clerical Workers (CPI-W) became Social Security's inflation-tracking tool that would be used for annual COLAs. The CPI-W is composed of eight major spending categories and countless subcategories. The key is that every category has a respective percentage weighting, which allows the CPI-W to be boiled down to a single figure each month. This makes for clean month-to-month and year-to-year comparisons.
The unique thing about Social Security is that only the trailing-12-month (TTM) readings from the third quarter (July to September) are used to calculate the COLA for the upcoming year. If the average CPI-W reading from the third quarter of the current year is higher than in the corresponding period last year, Social Security checks are poised to get bigger.
The magnitude of the "raise" to be passed along equates to the year-over-year percentage difference, rounded to the nearest tenth of a percent, in average third-quarter CPI-W readings.
A meaningful increase in the prevailing rate of inflation has led to three consecutive COLAs of better than 3%. U.S. Inflation Rate data by YCharts.
Social Security's 2025 cost-of-living adjustment forecast is coming into focus
Meaningful COLAs have been few and far between since the Great Recession. Though the average COLA is 2.6% over the last 20 years, there have been three years with no COLA (2010, 2011, and 2016), and 10 years since 2010 with COLAs of 2% or lower.
However, the previous three COLAs have bucked this trend. In 2022, 2023, and 2024, respective COLAs of 5.9%, 8.7%, and 3.2% were passed onto beneficiaries. In particular, the 8.7% COLA in 2023 was the largest percentage increase in 41 years.
If the 2025 COLA were to come in at or above 3%, it would mark the first time in 32 years that the annual COLA reached the 3% threshold in four straight years. Meanwhile, simply hitting the two-decade average of 2.6% in four consecutive years hasn't occurred since 1997.
Following the release of the June inflation report by the U.S. Bureau of Labor Statistics (BLS), which showed modest easing in the core inflation rate, estimates for Social Security's 2025 COLA are beginning to narrow and come into focus.
The nonpartisan senior advocacy group The Senior Citizens League (TSCL) responded to this moderation in core inflation by slightly increasing its 2025 COLA forecast to 2.63% (which would round to 2.6%) from 2.57% following the May inflation report. This prediction would put the 2025 COLA right on par with the two-decade average.
Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, reduced her 2025 cost-of-living adjustment forecast to 2.7% from the 3% she expected after the release of the May inflation report by the BLS.
For the program's more than 51 million retired-worker beneficiaries, a 2.6% or 2.7% COLA in 2025 would increase their monthly checks by $50 to $52. Comparatively, a cost-of-living adjustment of 2.6% or 2.7% next year would translate to respective monthly increases of $40 to $42 for workers with disabilities and $39 to $41 for survivor beneficiaries.
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Social Security's 2025 COLA is shaping up as a worst-case scenario for retirees
Four consecutive COLAs at or above 2.6% hasn't occurred in 28 years and probably sounds great on paper. Unfortunately, the setup for 2025 arguably couldn't be worse for retirees.
In a perfect world, the Federal Reserve would be able to keep inflation in check, and Social Security's COLAs would ensure that its beneficiaries don't lose purchasing power. But in reality, the nation's central bank has struggled to bring core inflation down following the COVID-19 pandemic, and retirees have endured a fairly steady loss of purchasing power since this century began.
In May 2023, TSCL released an analysis that compared the cumulative effect of COLAs between January 2000 and February 2023 to the aggregate price changes experienced by a broad basket of goods and services that seniors typically purchase. Whereas 23 years of COLAs had increased benefits by an aggregate of 78%, the commonly purchased basket of goods and services had increased in price by 141.4%. All told, the purchasing power of a Social Security dollar has declined by 36% since 2000.
Even though Social Security's 2025 COLA looks to be on pace for another average or above-average increase, the expense categories responsible for this feat are costs that disproportionately impact seniors. For instance, shelter is the highest-weighted component within the CPI-W and Consumer Price Index for All Urban Consumers (CPI-U).
Over the TTM period, shelter inflation totaled 5.2% for the CPI-U, or roughly double the estimated COLA for 2025. Seniors spend a higher percentage of their monthly budgets on shelter expenses than the typical working-age American. Likewise, medical-care services inflation has been picking back up -- 3.3% over the TTM (for the CPI-U), as of June 2024.
With two important expenses for retirees outpacing the 3.2% COLA they received in 2024 and the 2.6%-2.7% forecast COLA for 2025, it looks like it will be a near certainty that disappointment -- i.e., another year of lost purchasing power -- awaits seniors, once again.
