Social Security’s cost-of-living adjustment (COLA) forecast for 2025 increases, but seniors won’t be happy

When most Americans reach retirement age, they rely to some extent on their Social Security income. Over the past 22 years, annual surveys by the national pollster Gallup have found that between 80% and 90% of retired workers rely on their monthly benefit as a “major” or “minor” source of income. “.

Given the vital importance of Social Security income to the financial well-being of our nation’s aging workforce, it is not surprising that the announcement of the cost of living adjustment (COLA) from the Social Security Administration in October will be the most anticipated event of the year for many seniors.

As signs continue to point to tighter Social Security checks for the program’s more than 67 million beneficiaries in 2025, seniors have a legitimate reason to be dissatisfied.

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What is Social Security’s cost of living adjustment (COLA) and how is it calculated?

The legendary Social Security “COLA” that you often hear about in the news is the program’s mechanism for keeping up with inflation. If the prices of goods and services that seniors regularly purchase increase from year to year, Social Security benefits should, ideally, increase by a proportionate amount to avoid any loss of purchasing power. COLA is simply that measure designed to keep benefits on par with inflation.

Before 1975, COLAs were arbitrarily transmitted at random intervals by special sessions of Congress. There was not a single COLA in the 1940s and 11 adjustments were made between 1950 and 1974.

Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the program’s annual inflation indicator. The CPI-W has more than half a dozen major spending categories and a long list of subcategories, all of which have their own respective weightings. The purpose of these individual weights is to help reduce the CPI-W to a single digit. This allows simple month-to-month and year-to-year comparisons to be made to determine whether the price of a broad basket of goods and services has increased or decreased.

Only CPI-W readings from the third quarter (July through September) are used to calculate the Social Security COLA. Although the other nine months can help identify inflationary/deflationary trends, they will not be used in the final COLA calculation.

If the average CPI-W figure for the third quarter (Q3) of the current year increases compared to the average CPI-W figure for the third quarter of the previous year, beneficiaries will receive a larger payment the next year. The amount of the increase is simply the year-over-year percentage difference in the third-quarter average CPI-W readings, rounded to the nearest tenth of a percent.

In the unlikely event that prices fell (deflation) from one year to the next, which has only happened three times since 1975, profits would remain unchanged the following year.

A slight reacceleration of the current inflation rate could equate to an even larger Social Security check in 2025. US inflation rate data from YCharts.

Good news: Social Security checks are expected to increase more than initially expected

Over the past three years, Social Security recipients have received above-average cost-of-living adjustments of 5.9% (for 2022), 8.7% (for 2023), and 3.2%. (for 2024). This compares to an average COLA of 2.6% over the past 20 years.

Following the release of January’s inflation report in February, nonpartisan senior advocacy group the Senior Citizens League (TSCL) updated its long-term Social Security COLA forecast for 2025 at 1.75%. Believe it or not, it was actually a increase compared to the 1.4% COLA they had forecast for 2025 the previous month.

But things continued to improve with the release of new inflation reports from the Bureau of Labor Statistics.

The March inflation report, released on April 10, shows a slight re-acceleration in the current inflation rate over the past 12 months. While the CPI-W increased 3.5% from the previous year, TSCL once again updated its long-term COLA forecast for 2025 to (drumroll) 2.6%. – the average COLA over the last two decades.

In just three months, Social Security COLA estimates for 2025 have nearly doubled.

What would a 2.6% cost-of-living adjustment mean in nominal dollars? Based on the $1,913.31 check the average retired worker beneficiary received in March, a 2.6% COLA would increase their benefit by just under $50 per month next year.

As for the nearly 7.3 million workers receiving disability benefits and the approximately 5.8 million survivors receiving the program, average monthly checks are expected to increase by $40 and $39, respectively.

Image source: Getty Images.

The Social Security COLA continues to harm seniors

On paper, a steadily rising COLA forecast probably sounds like great news. Even if COLA estimates for 2025 remain steady at 2.6% through the third quarter, it would mark the fourth consecutive year of benefit increases at or above average since 2004.

But if seniors dig a little harder to understand why the current inflation rate, and therefore Social Security’s COLA forecasts, are increasing, they won’t be happy.

The Consumer Price Index for All Urban Consumers (CPI-U) is a measure of inflation similar to the CPI-W. Although both the CPI-U and the CPI-W have a number of major spending categories, one in particular continues to put obstacles in the way. I’m talking about housing inflation.

“Shelters” refers to rental costs, including utility expenses, as well as landlord equivalent rent, which looks at the estimated cost of renting an owner’s existing home, minus utility expenses . Housing is the largest weighting in the CPI-W and CPI-U. Additionally, older adults spend a disproportionately higher percentage of their monthly budget on housing expenses than working-age Americans.

In March, housing inflation reached a scorching 5.7% on an unadjusted trailing 12-month CPI-U basis.

With the Federal Reserve determined to fight inflation, interest rates have risen at their fastest pace in four decades. In turn, mortgage rates have soared from where they were a few years ago and have virtually paralyzed existing home sales. There is no simple solution to the problems in the housing sector, which means that there is no panacea that can bring down housing inflation in the near future. Even with an average or above-average COLA, the housing inflation that seniors face is almost guaranteed to result in a loss of purchasing power of their Social Security income in 2025.

According to TSCL, the purchasing power of a Social Security dollar fell 36% between January 2000 and February 2023. Until changes were made to the CPI-W to better reflect the pricing issues facing seniors face, seniors represent 86% of the population. Beneficiaries of Social Security, this loss of purchasing power risks getting worse.

Even with an upward forecast for Social Security’s 2025 COLA, seniors have little reason to be happy.