The countdown is on to the biggest date on the calendar for Social Security. I'm referring to the announcement of next year's cost-of-living adjustment (COLA) amount.
Technically, the Social Security Administration (SSA) hasn't said when it will announce the 2025 COLA. However, the agency always follows quickly behind the U.S. Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) news release for September. And that release is scheduled for 8:30 a.m. ET on Oct. 10, 2024.
We can safely conclude, therefore, that the 2025 Social Security COLA announcement is only 26 days away. Here's what retirees' increase will be as things stand now.
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How the Social Security COLA is calculated
Before we get to what the Social Security COLA could be, it's important to understand how the adjustment is calculated. The critical driver behind the amount of the annual COLA is inflation.
Inflation, in simple terms, is an increase in prices. There are several ways to measure inflation, but the one that matters for Social Security beneficiaries is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W measures the change in prices paid for various goods and services by primarily blue collar workers who live in urban areas.
When inflation is measured is also important for calculating the annual COLA. The Social Security Administration (SSA) only uses CPI-W values from the third quarter of the current and previous years. The COLA is the percentage increase (if any) between the average CPI-W for the third quarter of the current year and the average for the third quarter of the previous year. The amount is rounded to the nearest tenth of 1%.
What if there was no increase in the average CPI-W? Social Security beneficiaries won't receive a COLA. This has happened three times in the last 15 years, most recently in 2015.
Where things stand as of now
So far in 2024's Q3, the average CPI-W is 2.4% above the average for 2023's Q3. That matches the year-over-year CPI-W increase in August, based on data recently released by BLS.
However, independent Social Security analyst Mary Johnson estimates that the 2025 Social Security COLA will be 2.5%. Johnson's projection assumes that the September CPI-W announced next month will reflect a slight acceleration in inflation.
But inflation is clearly moderating. The "headline" inflation metric -- the Consumer Price Index for All Urban Consumers (CPI-U) -- for August rose by the smallest year-over-year amount since February 2021. It's possible that the actual 2025 COLA could be 2.4% instead of the 2.5% predicted by Johnson.
Good news for retirees?
In 2023, retirees received a 3.2% increase in their Social Security benefits. Since 2000, the average Social Security COLA has been 2.6%. As things stand now, the increase for 2025 will be below both levels. Is that good news for retirees? Yes and no.
COLAs help offset the erosion of the buying power of Social Security benefits caused by inflation. However, the increases are always received after retirees have incurred higher prices. Because of this, it's to retirees' advantage overall that inflation and the next year's COLA are lower.
There is a problem with the Social Security COLA, though, whether it's 2.4%, 2.5%, or a different value. The CPI-W used to calculate the adjustment isn't geared toward the higher prices paid by older Americans. For example, healthcare costs aren't weighted as heavily as they probably should be. In August, the prices of medical care services rose 3.2% year over year, well above the overall inflation level.
Retirees should find out in 26 days what the actual 2025 Social Security COLA will be. Whatever the final amount, be prepared for inflation to make a bigger dent in your disposable income than your increase will compensate for.
