There are some words consumers hate seeing, and "inflation" is usually one of them. All it takes is a walk around a convenience or retail store to realize that nowadays, a dollar doesn't go nearly as far as it used to some years ago.
From an economic standpoint, inflation is generally seen as better than deflation, but that doesn't lessen its effects on your everyday person. This is especially true for people on a fixed income, like many Social Security recipients. Luckily, Social Security has a cost-of-living adjustment (COLA) intended to help offset some of the effects of inflation.
Official Social Security COLA numbers won't be released until October, but it's never too early to begin thinking about a possible range it could fall within. Unfortunately, current COLA estimates likely won't send retirees jumping for joy when compared to the past five decades. Let's take a look at why.
Image source: Getty Images.
How Social Security determines what the COLA will be
Social Security decides the COLA using one metric: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It's a monthly metric that considers everyday household items, transportation, food and grocery costs, and other relevant expenses. Below are examples of specific items it takes into account:
- Household items: toilet tissue, cleaning supplies, and detergent.
- Transportation: gas, public transportation rates, and vehicle maintenance.
- Food and groceries: vegetables, bread, milk.
The CPI-W is based on the spending of families living in urban areas where more than 50% of the family's income is earned from clerical (office) or hourly wage occupations. According to the U.S. Department of Labor, this is around 32% of the U.S. population.
Social Security averages the CPI-W data for the third-quarter months (July, August, and September) and compares it to the previous-year's data to determine the COLA for the upcoming year. For example, if the CPI-W average for one year is 200 and then 205 the following year, the COLA would be set at 2.5% because the 5-point change is 2.5% of the starting 200.
If the CPI-W data for one year is less than the previous year's, Social Security will not reduce monthly benefits; they will remain the same. For example, if the CPI-W average for one year is 205 and then 200 the following year, the COLA would be set at 0% instead of being reduced by 2.5%.
Social Security COLA projections for 2025
The Senior Citizens League (TSCL) is a senior advocacy group known for its COLA predictions. The group's predictions are far from foolproof and have been off from time to time, but they can give retirees a broad idea of what to expect and help them get a jump-start on their financial planning.
In its latest prediction, released on Aug. 14, TSCL projects the 2025 COLA to be 2.57%, down from the 2.63% it projected in July. Since Social Security COLAs only go over one decimal place, let's meet in the middle at 2.6% in both cases.
How the 2025 COLA compares to the past 50 years
A 2.6% COLA would be the smallest since 2021. The good news is that it means inflation has cooled down over the past few years. The bad news is that it would be the smallest COLA since 2021. It's kind of a bittersweet trade-off. 2.6% increase would also be less than the 3.4% average since COLAs were automatically implemented beginning in 1975. To give you a bit more perspective, here are the largest five COLAs since 1975.
| Year | COLA |
|---|---|
| 1980 | 14.3% |
| 1981 | 11.2% |
| 1979 | 9.9% |
| 2023 | 8.7% |
| 1975 | 8% |
Source: Social Security Administration.
On the flip side, here are the smallest five COLAs since 1975.
| Year | COLA |
|---|---|
| 2010, 2011, 2016 | 0% |
| 2017 | 0.3% |
| 1987, 1999, 2021 | 1.3% |
| 2003 | 1.4% |
| 2014 | 1.5% |
Source: Social Security Administration.
A 2.6% COLA wouldn't be the worst thing in the world, but it's fair to say that a lot of Social Security recipients would also appreciate a larger figure. In either case, it's better to prep now for a more modest increase than to be caught off guard when the official number is released in October.
