Social Security payments get an annual cost-of-living adjustment (COLA) to protect the buying power of benefits from inflation. COLAs depend on how the CPI-W (a subset of the Consumer Price Index) changes in the third quarter, meaning the three-month period running from July through September. For example, the CPI-W rose 3.2% in the third quarter of 2023, which led to a 3.2% COLA for Social Security benefits in 2024.
The Social Security Administration cannot calculate the official COLA for 2025 until the Labor Department releases its September inflation report later this year, on Oct. 10. But The Senior Citizens League, a nonprofit and nonpartisan advocacy group, has already made several COLA forecasts, each one higher than the last.
That may sound like good news. Unfortunately, the most recent COLA forecast comes with bad news and worse news. Here’s what you should know.
The bad news: Social Security benefits are on track to get a smaller cost-of-living adjustment (COLA) next year.
The Senior Citizens League (TSCL) recently revised its 2025 cost-of-living adjustment (COLA) forecast to 2.6%. That is higher than its previous estimate of 1.8%, which itself was higher than the previous estimate of 1.4%. But TSCL’s latest COLA forecast is still bad news for retired workers struggling with inflation.
Social Security benefits got an almost unprecedented 8.7% COLA last year, followed by an above-average 3.2% COLA this year. However, the 2024 Retirement Confidence Survey (RCS) still found that 26% of retired workers doubt they have enough money to live comfortably through retirement, and 56% expect to make substantial spending cuts due to inflation.
I say the latest COLA forecast is bad news because those statistics are unlikely to improve if Social Security benefits increase 2.6% next year, simply because that figure is smaller that both of the preceding COLAs. However, the findings of the 2024 RCS beg the question: Why are so many retirees struggling with inflation?
One explanation is that Social Security COLAs depend on third-quarter changes in the CPI-W, which means benefits could fall behind inflation if the full-year CPI-W increases more profoundly than the third-quarter CPI-W. Lo and behold, that is precisely what happened last year: The full-year CPI-W increased 3.8%, but the third-quarter CPI-W (and Social Security benefits) increased just 3.2%.
The worse news: Social Security benefits may lose more purchasing power than the CPI-W inflation numbers suggest
The TSCL’s forecast for a 2.6% COLA in 2025 may come with worse news. The problem I just described — that is, the full-year CPI-W increased more than the third-quarter CPI-W last year — implies that Social Security benefits lost buying power. But the numbers I gave may understate the problem, because the CPI-W may be a poor measure of inflation for Social Security recipients.
To elaborate, Social Security COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a metric that reflects spending patterns among office workers and hourly wage earners. But workers tends to spend money differently than retirees on Social Security. For instance, retirees often spend more on housing and healthcare.
To that end, certain experts believe COLAs should be calculated using another subset of the CPI known as the Consumer Price Index for the Elderly (CPI-E), a metric that reflects spending patterns among individuals aged 62 and older. If the CPI-E is indeed a better measure of inflation for Social Security recipients, then the forecasted COLA of 2.6% in 2025 is even worse news for two reasons.
First, the full-year CPI-E increased 4.6% in 2023, meaning benefits lost even more purchasing power than implied by the full-year CPI-W increase of 3.8%. Second, the CPI-E increased 3.6% during the first quarter of 2024, while the CPI-W increased just 3.2% during the same period. In other words, CPI-E inflation is once again running hotter, so Social Security benefits may lose more purchasing power next year than the CPI-W inflation numbers suggest.
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The Social Security Cost-of-Living Adjustment (COLA) Forecast for 2025 Was Just Updated, and It Comes With Bad News and Worse News for Retirees was originally published by The Motley Fool
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