Even though we're nowhere close to the end of 2024, a lot of people who collect Social Security are eager to know what sort of raise their benefits will get once the new year begins. Unfortunately, they'll have to sit tight a bit longer to get an answer.
Social Security's cost-of-living adjustments, or COLAs, are calculated based on third-quarter inflation data. Since we're only roughly at the midpoint of the year's third quarter, we're not particularly close to narrowing down that number. In fact, the Social Security Administration isn't expected to make a 2025 COLA announcement until October.
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Still, there are educated guesses as to what 2025's Social Security COLA will amount to, based on the inflation data we have so far. And the latest projection isn't looking too rosy.
But no matter what 2025's Social Security COLA will amount to, seniors who rely on those monthly benefits will likely be disappointed. And there's a big reason for that.
A flaw in the system
Based on recent inflation numbers, the nonpartisan Senior Citizens League is projecting that Social Security benefits will rise 2.57% in 2025. That's a notch below previous estimates and a considerably lower raise than the 3.2% COLA seniors received at the start of 2024.
Even if that 2.57% projection shifts upward, there's a good chance that Social Security beneficiaries won't end up happy with their COLAs. And the reason is that it's likely to fall short of its goal -- which is to make sure seniors are able to maintain their buying power in the face of inflation.
The Senior Citizens League reports that as of 2023, Social Security recipients had lost 36% of their buying power since the year 2000. And that largely boils down to insufficient COLAs.
Why are COLAs consistently such a letdown? It's because the way they're calculated has a serious flaw.
Social Security COLAs are based on fluctuations in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But the problem is that the CPI-W doesn't accurately capture the costs that Social Security beneficiaries commonly face.
Think about the typical spending of an urban wage earner or clerical worker, versus that of a retired senior. It stands to reason that people in the former group may spend more on gas and transit, while people in the latter group are likely to spend more on healthcare, just because they're older.
The CPI-W is specific to urban wage earners, but plenty of seniors live outside of urban areas since they no longer need to be in close proximity to jobs. So that's yet another disconnect.
There needs to be a better way
Until a major change happens in the way Social Security COLAs are calculated, seniors will likely be disappointed with those raises year after year. A more equitable way of arriving at COLAs is to use the CPI-E -- the Consumer Price Index for the Elderly. Some lawmakers have pushed for this change, but so far, there's been no movement.
All told, 2025's Social Security COLA probably won't keep up with inflation, simply because that's what tends to happen. Beneficiaries who are struggling to manage their bills should look for ways to reduce spending or consider joining the gig economy for extra income, rather than hope for a Social Security raise that somehow does the trick.
In time, things could change for the better. But for now, retirees may need to take matters into their own hands to improve their financial pictures.
