Social Security’s cost-of-living adjustment (COLA) forecast for 2025 was just updated and could surprise retirees
High inflation at the end of the pandemic led to a historic 8.7% cost of living adjustment (COLA) for Social Security benefits in 2023. Retired workers had not received a pay increase so important for four decades. Yet the 2023 Retirement Confidence Survey (RCS) conducted by the nonprofit Employee Benefits Research Institute (EBRI) found that many retirees continued to struggling with financial difficulties last year.
“Workers’ and retirees’ confidence in their ability to fund their retirement has declined significantly in 2023,” said Craig Copeland, director of wealth benefits at EBRI. “The last time a drop in confidence of this magnitude occurred was in 2008, during the global financial crisis.” The RCS also found that 58% of retirees planned to significantly reduce their spending to keep pace with rising prices.
Adding to these concerns, Social Security benefits got a COLA of less than 3.2% this year, much to the dismay of many recipients. Indeed, 71% of retirees surveyed by the Senior Citizens League (TSCL), a nonprofit senior advocacy group, said household costs have increased by more than 3.2% and 53% have already spent their emergency savings.
To that end, many retirees are likely hoping (and perhaps even expecting) a larger increase in their benefits next year. Unfortunately, the latest TSCL projection shows that the Social Security COLA will decrease again in 2025.
Why Social Security COLAs May Have Lagged Behind Inflation
Social Security cost-of-living adjustments (COLAs) are based on the average inflation rate during the third quarter, the three-month period that includes July, August, and September. Interestingly, COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the better-known CPI-U.
I call this curious because the CPI-W tracks price changes from the perspective of office workers and other employees who earn hourly wages. But these people tend to spend their money differently than Social Security recipients. For example, workers may spend more on clothing and education, while retirees tend to spend more on housing and health care. Some experts believe this gap explains why COLAs may have lagged behind inflation.
The calculation itself is simple: the CPI-W for the third quarter of the current year is divided by the CPI-W for the third quarter of the previous year, and the percentage increase (if applicable) becomes the COLA of the following year. For example, the CPI-W increased by 3.2% in the third quarter of 2023, so Social Security benefits increased by 3.2% in 2024.
Social Security benefits are on track to reach a COLA of 2.6% in 2025
Inflation has certainly moderated since its peak in June 2022, but a worrying trend has emerged in recent months. Rather than continuing to decelerate, consumer prices are regaining strength. Specifically, the CPI-W rose 2.9% in January, 3.1% in February and 3.5% in March, the highest figure in seven months.
The March figure of 3.5% is particularly troubling because it exceeds the 3.2% COLA applied to Social Security benefits this year. That means benefits lost purchasing power last month because they rose less quickly than consumer prices. If this trend persists, beneficiaries could find themselves in an increasingly difficult financial situation as the year progresses.
Despite this challenge, Social Security payments are on track to reach a COLA of 2.6% next year, according to the Senior Citizens League. This updated forecast exceeds the 1.8% COLA the group predicted in February, but it is lower than the 3.2% COLA distributed in 2024. This is certainly an unpleasant surprise for many retirees.
As a reminder, the average retiree benefit was $1,910.79 per month in February 2024. Adding 2.6% to that figure brings the total to $1,960.47, meaning the average retiree would receive about $49.68 more per month if Social Security benefits actually increased by 2.6%. COLA in 2025.
Of course, this figure is only an estimate. The Social Security Administration cannot determine the official COLA until third-quarter inflation data is available. This information is usually released in mid-October. In the meantime, retired workers should hope for the best but prepare for the worst. Meticulous budgeting and frugal spending are good places to start.
Plus, it wouldn’t hurt to earn some extra income. That could mean finding a part-time job or simply moving money into a high-yield savings account, many of which look attractive given that interest rates have risen significantly.
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Social Security’s cost-of-living adjustment (COLA) forecast for 2025 was just updated and could surprise retirees.
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