The 2025 Social Security cost-of-living adjustment (COLA) came in at just 2.5%. That's well under the 3.2% retirees got last year and far less than what many were hoping for. The high inflation over the last few years has made it difficult for retirees to afford their basic expenses, and many fear this will only get worse in 2025.
For years, groups like The Senior Citizens League (TSCL) have been calling for changes to the way the government calculates COLAs, but so far, there hasn't been any movement. The following two options, though far from a certainty, could significantly improve retirees' finances and help Social Security maintain its buying power over time.
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1. Instituting a minimum COLA of 3%
Right now, Social Security COLAs are tied to the inflation rate as determined by annual changes in the third-quarter Consumer Price Index for Urban and Wage Earners and Clerical Workers (CPI-W). The 2024 third-quarter average was 2.5% higher than the 2023 third-quarter average, hence the 2.5% COLA.
But many feel this isn't sufficient. TSCL found that Social Security benefits have actually lost about 20% of their buying power since 2010, largely due to insufficient COLAs. Instituting a mandatory floor of 3% would make it more likely that Social Security's buying power will at least hold steady over time.
It's also possible that in some years where inflation is lower, like 2024, a mandatory 3% COLA could increase Social Security's buying power a little. But it's unclear whether the government would actually allow this.
2. Basing COLAs on the CPI-E instead of the CPI-W
One of the oddest things about the Social Security COLA calculation is that the CPI-W actually excludes retiree households. It focuses specifically on urban households with at least one-half of their income coming from clerical or hourly wage occupations. Those 62 and older are covered by a separate index known as the Consumer Price Index for the Elderly (CPI-E).
Many understandably feel the Social Security Administration should use the CPI-E instead of the CPI-W to calculate benefits because the CPI-E more accurately reflects senior spending. This can be quite different from the spending habits of workers.
TSCL found that if the government had used the CPI-E instead of the CPI-W, retirees would've gotten larger COLAs in seven out of 10 years between 2014 and 2024. That would've earned the average beneficiary nearly $2,700 more over that time.
Between this idea and the mandatory 3% COLA floor, the switch to the CPI-E is more likely to happen. Some politicians have put forth this idea over the years, but so far, it hasn't gained any traction.
Are these changes likely to happen?
Many retirees -- and workers, for that matter -- are curious about whether the government is actually going to make any reforms to Social Security or its COLAs. While we can't predict the future, it's safe to say this isn't likely anytime soon.
Social Security is facing a funding crisis, with its trust funds expected to be depleted in roughly a decade. Without government intervention, this would lead to benefit cuts of around 23%. It's unlikely it'll go this far. Social Security has been in trouble before, and the government has made changes to keep it going.
But it probably won't make any changes that would boost Social Security's COLA right now because that could drain the trust funds even faster. It's more likely that any changes to the COLAs would occur alongside a government plan to increase Social Security's future funding.
This is all speculation right now. All we can do, apart from making it clear to our legislators that Social Security is an important issue for us, is to build up our own savings as much as possible. The less dependent we are on Social Security, the less affected we'll be by whatever happens in the future.
