Social Security benefits are projected to receive a lower Cost of Living Adjustment (COLA) next year, and this increase may not be enough to offset the effects of inflation. Annually, Social Security benefits are adjusted through COLA to safeguard the purchasing power of beneficiaries against inflation. This adjustment is based on changes in the CPI-W (a component of the Consumer Price Index) during the third quarter, from July to September. For instance, in 2023, the CPI-W rose by 3.2% during this period, resulting in a 3.2% COLA for 2024.
The Social Security Administration must wait until the Department of Labor publishes its September inflation report on October 10th this year to calculate the official COLA for 2025. However, the Senior Citizens League, a nonpartisan, nonprofit advocacy group, has already issued several COLA forecasts, each higher than the last.
These initial forecasts might seem promising, but they bring concerning news. Here’s why.
Discouraging News: COLA Forecast and Its Impact
The worrisome news is that a lower COLA is projected for next year. The Senior Citizens League recently revised its COLA forecast for 2025 to 2.6%, up from its earlier estimate of 1.8%, which had previously increased from 1.4%. Although the most recent forecast is higher than previous ones, it remains a concern for retirees facing inflation.
Even though last year Social Security benefits saw an unprecedented COLA increase of 8.7%, followed by a higher-than-average 3.2% this year, the 2024 Retirement Confidence Survey (RCS) found that 26% of retirees doubt having enough money to live comfortably during retirement, and 56% expect to make significant spending cuts due to inflation.
The reason the latest COLA forecast is concerning is its comparison to previous COLAs. Moreover, retirees may be even worse off if annual CPI-W increases exceed those of the third quarter. Last year, the annual CPI-W rose by 3.8%, but the third-quarter increase was only 3.2%.
Worst News: Loss of Purchasing Power Beyond CPI-W Figures
The forecast of a 2.6% COLA for 2025 suggests that Social Security benefits might lose even more purchasing power than expected. The issue lies in the fact that CPI-W may not be the most accurate measure of inflation for Social Security beneficiaries. The CPI-W, used to calculate COLAs, reflects spending patterns among office workers and hourly wage earners, but retirees typically spend more on housing and healthcare.
Some experts believe that the Consumer Price Index for the Elderly (CPI-E), which tracks spending patterns among individuals over 62, might be a more appropriate indicator. Considering the CPI-E, which rose by 4.6% in 2023 and 3.6% in the first quarter of 2024, Social Security benefits might be losing more purchasing power than the CPI-W figures suggest, painting an even more challenging outlook for next year.
What is the COLA (cost of living adjustment) in the United States?
COLA (Cost-of-Living Adjustment) is a mechanism used in the United States to adjust income to changes in the cost of living. Primarily applied to Social Security benefits, pensions and wages in some sectors, COLA seeks to maintain the purchasing power of individuals in the face of inflation.
The rate of adjustment is determined annually based on the Consumer Price Index (CPI), ensuring that earnings are adjusted in accordance with rising prices for essential goods and services. This adjustment is crucial to financially protect retirees and employees in specific sectors.