In July, more than 51.2 million retired workers brought home an average check of $1,919.40 from Social Security. This program, which was signed into law in August 1935 and doled out its first retired-worker check in January 1940, is vital to the financial well-being of most aging Americans.
For 23 consecutive years, national pollster Gallup has questioned retirees about their reliance on the income they receive from America's top retirement program. Consistently, between 80% and 90% of retirees note that they need their monthly payout to cover at least some portion of their expenses.
For retirees, nothing is more important or anticipated than the annual cost-of-living adjustment (COLA) reveal, which is now less than seven weeks away (Oct. 10, 2024). The exciting aspect of Social Security's 2025 COLA is that it's on pace to do something that no one has witnessed this century. But at the same time, it's still liable to leave retirees disappointed.
Image source: Getty Images.
What is Social Security's COLA and why does it matter?
Social Security's cost-of-living adjustment is the mechanism by which benefits are adjusted on a near-annual basis to account for changes in price for a large basket of goods and services.
Imagine, for a moment, if the price for the goods and services you regularly purchase increases by 5% from one year to the next. You'd also want your income to rise by 5% to ensure you can still purchase the same amount of goods and services. Social Security's COLA is the tool that adjusts benefits for inflation in an effort to ensure no loss of purchasing power.
Between the first mailed retired-worker check in January 1940 and 1974, COLAs were entirely arbitrary and passed along by special sessions of Congress. Following no COLAs during the entirety of the 1940s, 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 annual inflationary index used to calculate Social Security's COLA. The CPI-W has more than a half-dozen major spending categories and a long list of subcategories, all of which feature their own unique percentage weightings. It's these specific weightings that allow the CPI-W to be expressed as a single figure at the end of each month, which makes for concise year-over-year comparisons to determine if prices are rising (inflation) or falling (deflation).
Even though the CPI-W is reported on a monthly basis, only the trailing-12-month readings from July through September are used in the annual COLA calculation. If the average CPI-W reading from the third quarter of the current year has increased from the average CPI-W reading in the comparable period of the previous year, the collective price for goods and services has climbed and beneficiaries are due to receive a cost-of-living adjustment in the upcoming year.
For those curious, the year-over-year percentage difference in average third-quarter (July-September) CPI-W readings, rounded to the nearest tenth of percent, determines how much benefits increase the following year (i.e., the COLA).
A sizable uptick in the U.S. inflation rate has led to three consecutive years of above-average COLAs. US Inflation Rate data by YCharts.
This would be a first this century for Social Security's cost-of-living adjustment
Since 2010, Social Security's COLAs have been mostly anemic. There have been 10 years where COLAs were 2% or below, including the smallest positive COLA in history (0.3% in 2017), and three years where no COLA was passed along because of deflation (2010, 2011, and 2016).
However, this trend has shifted in a big way over the previous three years. In 2022, 2023, and 2024, Social Security passed along respective cost-of-living adjustments of 5.9%, 8.7%, and 3.2%, which are all well above the 2.6% average COLA over the last 20 years. The 8.7% increase to benefits in 2023 was the largest in 41 years on a percentage basis.
Following the release of the July inflation report, nonpartisan senior advocacy group The Senior Citizens League (TSCL) updated its forecast for Social Security's 2025 COLA to 2.57%, which rounds up to 2.6%. This is more or less on par with its prediction of 2.63% after the June inflation report, and is a mirror image of its 2.57% COLA forecast for 2025 following the May inflation report.
Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, decreased her 2025 COLA forecast for a third consecutive month. Johnson's prediction that Social Security's 2025 COLA will be 2.6% aligns perfectly with that of TSCL.
Although 2.6% COLA would represent the smallest percentage increase to benefits in four years, it would mark the first time this century that we've witnessed four consecutive years with COLAs of at least 2.6%. The last time this occurred was 28 years ago.
For Social Security's more than 51 million retired-worker beneficiaries, a 2.6% COLA would translate into an average monthly increase of roughly $50 next year.
Comparatively, the average monthly payout in 2025 for workers with disabilities and survivor beneficiaries would be expected to increase by approximately $40 and $39, respectively.
Image source: Getty Images.
Disappointment looms large for retirees
If Johnson's and TSCL's matching forecasts of a 2.6% COLA in 2025 prove accurate for Social Security, it would mark the fourth straight year of COLAs meeting or surpassing the 20-year average. You'd think this would be a good thing for retirees -- but this couldn't be further from the truth.
Although the CPI-W is supposed to ensure that seniors don't lose purchasing power, it's doing a terrible job.
As the full name of this inflationary tether implies, it's an index focused on the spending habits of "urban wage earners and clerical workers." Urban wage earners and clerical workers are predominantly working-age Americans who aren't currently receiving a Social Security check. More importantly, they spend their money differently than retirees.
Seniors spend a higher percentage of their monthly budget on shelter expenses and medical care services than the typical working American. However, the CPI-W places no added emphasis on these two spending categories because it's focused on the spending habits of generally younger Americans.
On a trailing-12-month basis, the inflation rate for shelter -- shelter is the largest weighted component in the CPI-W -- and medical care services is well above the forecasts that call for a 2.6% COLA in 2025. In other words, it points to another year of Social Security dollars losing purchasing power.
To make matters worse, most recipients are liable to see their COLA reduced or gobbled up in its entirety by a sizable jump in Medicare Part B premiums. This is the segment of Medicare that covers outpatient services.
In May, the Medicare Trustees Report estimated that Part B premiums would climb 5.9% in 2025 to $185 per month. If Part B premiums more than double Social Security's COLA, the impact of this 2.6% benefit increase will be subdued.
Even if history is made for the first time this century, disappointment looms large, once again, for retirees.
