There's perhaps no more important announcement in the context of Social Security than each year's cost-of-living adjustment (COLA). Many seniors rely on Social Security to provide a large chunk of their retirement income. Because of this, they depend heavily on COLAs to keep up with their living costs from one year to the next.
On Oct. 10, the Social Security Administration announced a number of key changes to the program, set to take effect in 2025. Among them was news of a 2.5% COLA.
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Unfortunately, many seniors are reeling from that announcement, given the notably stingy nature of a 2.5% raise. Making matters worse, 2025's 2.5% raise pales in comparison to the COLAs received in recent years.
At the start of 2024, Social Security benefits rose 3.2%. The year before, seniors enjoyed a whopping 8.7% COLA. In that context, a 2.5% raise seems even less optimal.
But the fact that 2025's Social Security COLA is minimal isn't actually the biggest issue at hand. There's an even greater problem with 2025's COLA that lawmakers truly must address -- and quickly.
A flaw in the system
Technically speaking, a 2.5% Social Security COLA isn't terrible when you consider it's largely in line with the average raise over the past decade. Rather, the issue at hand is that seniors on Social Security typically lose buying power year after year regardless of what their COLAs actually amount to.
The nonpartisan Senior Citizens League reported last year that Social Security beneficiaries had lost 36% of their buying power since 2000 due to insufficient COLAs. And 2025's lackluster raise only exacerbates the situation.
The root of the problem is the formula used to calculate Social Security COLAs. Those raises are based on third-quarter changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But the CPI-W is not an accurate measure of the costs seniors on Social Security tend to face and the extent to which they tend to rise.
The CPI-W tracks the spending of wage earners. Many Social Security recipients are retired and, therefore, don't earn a wage (though it is permissible to work and collect Social Security at the same time).
As just one example, seniors on Social Security typically spend a large chunk of their income on healthcare. Wage earners might also spend a decent portion of their earnings on healthcare but not necessarily to the same extent as Social Security recipients.
The CPI-W also tracks the spending of people in urban areas. It's not a given that Social Security recipients reside in those same areas.
In fact, a big benefit of living in urban areas is gaining access to jobs. Retirees on Social Security don't necessarily need or want access to jobs. But the costs of living in a rural area may differ substantially from those in an urban area.
So, all told, the CPI-W is not a good measure for calculating COLAs. Because of this, seniors on Social Security have lost buying power through the years. And they're likely to lose buying power in 2025, even though a 2.5% COLA is by no means the smallest raise ever to come down the pike.
A big change is in order
One thing lawmakers could do to help seniors on Social Security stop losing buying power from year to year is to change the way the program's COLAs are calculated. A senior-specific index, like the Consumer Price Index for the Elderly (CPI-E), should better capture the costs that Social Security recipients face. Using that index over the CPI-W could help seniors manage better financially, as inflation naturally drives up the cost of living.
At this point, it's too late to do anything about 2025's Social Security COLA. That 2.5% raise is officially set, and seniors who get most of their income from Social Security will have to manage their expenses carefully to stretch that COLA as best as they can. But the hope is that lawmakers soon prioritize an overhaul of the current system so that seniors don't continue to lose buying power at such a rapid pace.
