For most retirees, Social Security isn't just a check they'll receive on a monthly basis. It represents a financial foundation that many would struggle to live without.
America's top retirement program was responsible for pulling 22.7 million people -- including 16.5 million adults aged 65 and over -- above the federal poverty line in 2022, according to an analysis from the Center on Budget and Policy Priorities. More importantly, this critical program has reduced the poverty rate for seniors to 10.2% from an estimated 38.7% if it didn't exist.
With tens of millions of Americans reliant on their Social Security income in some capacity to make ends meet, no announcement is more anticipated than the annual cost-of-living adjustment (COLA) -- and this much-awaited reveal is creeping closer.
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What, exactly, is Social Security's COLA, and when will it be announced?
The fabled COLA you're always hearing and reading about is the mechanism the Social Security Administration (SSA) relies on to ensure that beneficiaries don't lose buying power from one year to the next.
The price for almost all goods and services we buy changes over time. If the collective price for a basket of goods and services that retirees regularly buy rises, Social Security benefits should increase by a commensurate amount to ensure that the same amount of goods and services can be bought in the future. The cost-of-living adjustment is the increase designed to keep pace with inflation (i.e., rising prices).
From the first mailed retired-worker benefit check in January 1940 through December 1974, COLAs were determined on an arbitrary basis by special sessions of Congress. Only 11 COLAs were passed along during this period, and they ranged from 7% to a whopping 77% in October 1950. This historic increase was a reflection of no COLAs being administered in the entirety of the 1940s.
In 1975, the SSA began relying on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as its annual measure of price changes. The CPI-W has over a half-dozen major spending categories and a long list of subcategories, each with its own respective weightings. These percentage weightings allow the CPI-W to be whittled down to a single figure each month, which makes for crisp comparisons to the prior year to determine whether prices are rising (inflation) or falling (deflation).
What might come as a surprise is that Social Security's COLA calculation only encompasses the trailing-12-month readings ending with the third quarter (i.e., July through September). If the average third-quarter CPI-W reading for 2024 is higher than the average third-quarter CPI-W reading in 2023, inflation has occurred and Social Security checks will climb next year.
Determining the amount of this increase is simple, too. The year-over-year percentage increase in average third-quarter CPI-W readings, rounded to the nearest tenth of a percent, equals the COLA for the upcoming year.
The U.S. Bureau of Labor Statistics (BLS) is slated to release the September inflation report -- the final puzzle piece needed to calculate Social Security's COLA -- on Oct. 10 at 08:30 a.m., ET. While you can use the data from the BLS report to calculate the 2025 COLA yourself, the SSA will also announce the annual COLA mere minutes after the September inflation report hits the newswires.
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Are we less than three weeks away from history or disappointment?
Aside from needing to know when this all-important announcement will be made, the program's more than 68 million beneficiaries are likely itching to find out how much of an increase they can expect next year. In previous months, BLS inflation reports had pointed toward history being made on the COLA front.
After receiving three above-average cost-of-living adjustments of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024, projections of a 2.6% or 2.7% COLA in 2025 would have yielded a history-making moment. It's been 32 years since there were four consecutive years with a COLA of at least 2.7% and 28 years since four straight COLAs came in at 2.6% or above. Either way, it would have been a scenario not witnessed since the late 20th century.
However, this history-making 2025 COLA now looks to be a distant memory. Following the August inflation report, nonpartisan senior advocacy group The Senior Citizens League (TSCL) and independent Social Security and Medicare policy analyst Mary Johnson both lowered their 2025 cost-of-living adjustment forecasts to 2.5%.
While the difference between a 2.5% COLA in 2025 and a 2.6% or 2.7% COLA works out to only a few dollars per month for the average beneficiary, it's liable to lead to major disappointment for a majority of Social Security recipients.
A meaningful reduction in the prevailing rate of inflation has caused 2025 COLA estimates to fall. U.S. Inflation Rate data by YCharts.
For starters, a 2.5% COLA is highly unlikely to offset the inflationary pressures seniors are contending with from shelter and medical care services. Retirees spend a higher percentage of their monthly budget on shelter and medical care services than the typical working-age American. With the trailing-12-month inflation rate for shelter more than doubling the expected 2025 COLA, it would appear that retirees are set up for another loss of purchasing power next year.
Two separate analyses from TSCL have found that reduced buying power is something of a norm for seniors. By TSCL's estimation, the purchasing power of a Social Security dollar fell 20% since 2010 and a whopping 36% from January 2000 through February 2023.
But the biggest disappointment might just be the lack of a silver lining for Social Security recipients who are also enrolled in Medicare.
Based on estimates from the Medicare Trustees Report, the Part B premium is expected to climb by 5.9% to $185 per month in 2025. Part B is the segment of Medicare responsible for outpatient services. This would mark the second consecutive year that the premium has risen by 5.9% after it declined in 2023.
Since Part B premiums are usually deducted from the benefit checks of Medicare enrollees, there's a high probability that a majority of retired workers are going to see some, or perhaps all, of their 2025 COLA gobbled up by this outsize increase.
Though the chance of a historic cost-of-living adjustment still exists, it's much likelier that we're less than three weeks away from another disappointing COLA reveal.
