Each year, Social Security benefits get a cost-of-living adjustment (COLA) to help retired workers and other recipients keep up with rising prices. The Social Security Administration will announce the official 2025 COLA on Thursday, Oct. 10, shortly after the Labor Department publishes September inflation data.
Unfortunately, all evidence suggests the 2025 COLA will be a combination of bad news and worse news for Social Security recipients. Read on to learn more.
The bad news: Social Security benefits are on pace to get the smallest COLA since 2021
Social Security’s annual cost-of-living adjustments (COLAs) are based on a subset of the Consumer Price Index known as the CPI-W. Specifically, the CPI-W from the current year’s third quarter (July through September) is divided by the CPI-W from the previous year’s third quarter, and the percent increase becomes the COLA in the following year.
For that reason, the Social Security Administration cannot calculate the official 2025 COLA until the Labor Department publishes September inflation data. But the Senior Citizens League (TSCL), a nonprofit advocacy group, estimates that benefits will increase by 2.6% next year. That is bad news for Social Security recipients, especially those struggling to make ends meet.
Social Security benefits have received larger COLAs in each of the last three years: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. That means the projected 2.6% COLA in 2025 would be the smallest raise for beneficiaries since 2021. I doubt many retired workers will see that as a positive development. But there is actually a bigger problem brewing.
The worse news: Social Security benefits are on pace to lose buying power in 2025
TSCL believes Social Security benefits have lost 20% of their purchasing power since 2010 because COLAs have failed to keep pace with inflation. The root cause of that problem is the CPI-W, and the situation will likely deteriorate further in 2025.
To elaborate, the CPI-W considers inflation across eight major product groups, which are weighted based on workers’ spending patterns. But workers are usually young and tend to spend money differently than retired workers on Social Security. For instance, retirees generally spend more on housing and medications and less on transportation and education.
Put differently, from the perspective of retirees, the CPI-W puts too little emphasis on housing and medications and too much emphasis on transportation and education. That is particularly problematic because housing and medication costs have increased more quickly than the CPI-W year to date, while transportation and education costs have increased more slowly.
Specifically, the CPI-W rose 3.1% in the first seven months of 2024. Meanwhile, housing costs and medication prices increased 4.5% and 3.2%, respectively. But transportation costs increased by 2.8%, and education expenses actually declined by 0.2%. In other words, inflation in the underrepresented spending groups is increasing faster than average, while inflation in the overrepresented spending groups is increasing slower than average.
If the smallest COLA since 2021 is bad news, the outcome of the situation I just described is even worse news. It means the 2025 COLA will probably underestimate the real impact of rising prices on retired workers, so the benefit increase will be too small. In other words, Social Security benefits are on pace to lose more purchasing power in 2025.
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Social Security’s 2025 Cost-of-Living Adjustment (COLA) Looks Like Bad News and Worse News for Retirees was originally published by The Motley Fool
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