Social Security is a vital source of income for the majority of retirees. About half of households with someone age 65 or older receive at least 50% of their income from Social Security, according to data collected by the Social Security Administration. Six in 10 retirees say the program is a major source of income in the most recent iteration of an annual Gallup poll.
As such, those monthly benefits checks need to keep up with the rising costs seniors face due to inflation. The Social Security Administration provides a cost-of-living adjustment (COLA) every year based on a measure of inflation during the third quarter of the year. And while we haven’t reached July yet, when inflation readings start to count, it hasn’t stopped analysts from forecasting what the 2025 COLA could be.
The Senior Citizens League increased its 2025 COLA forecast to 2.66% following the most recent inflation reading for April. That’s an increase from earlier forecasts of 1.4% in January, 1.75% in February, and 2.6% in April. Still, many retirees may find the latest forecast surprising. Here are three reasons why.
1. Inflation isn’t coming down as quickly as expected
Despite the Federal Reserve’s efforts to tame inflation with tight monetary policies, it has struggled to push the annual inflation rate below the 3% mark. Meanwhile, its long-term goal is to get inflation back to about 2%.
The CPI-U, the most commonly cited measure of the Consumer Price Index, has increased by an average of 3.3% in the first four months of the year. It climbed 3.4% in April. As such, it may be hard for many to see average inflation rates falling down into the mid-2% range in just a few months.
Indeed, the Senior Citizens League foresaw a steep drop in inflation at the start of the year, but it has since revised its outlook. It may need to continue to revise that outlook without any signs of meaningful progress from the Fed’s attempt to curb rising prices. The Fed, for its part, is also less optimistic than it was at the start of the year.
2. Seniors don’t expect inflation to come down anytime soon
The average one-year inflation expectation among consumers aged 60 and older is 3.2%, according to the most recent survey data from the New York Fed. That’s in line with inflation experienced in the third quarter last year, although it’s been higher to start the year. That means seniors don’t expect meaningful progress from the Fed by the end of the year.
In other words, seniors expect inflation to climb at more than twice the rate expected by the Senior Citizens League through the third quarter. If CPI readings increase steadily at the rate seniors think they will, it would result in a COLA of about 3.3%.
The reality will likely fall somewhere in the middle. Just because seniors feel inflation will persist doesn’t mean it will. That said, initial projections from experts for a steep decline in inflation have needed revision since the start of the year.
3. The inflation seniors experience is different from the numbers used for the COLA
Perhaps the biggest reason seniors could be surprised by the latest COLA forecast has to do with the actual inflation they experience. As mentioned, seniors have high expectations for the growth in inflation. That may be because the things they spend the most on are increasing in price faster than things younger people spend their money on.
Unfortunately, the COLA is closely tied to the latter instead of the former. The COLA uses a subset of the CPI-U measurement called the CPI-W. It measures the inflation rate experienced by urban wage earners and clerical workers. It doesn’t require an advanced degree in economics to realize that urban wage earners have very different spending patterns from senior citizens.
The Bureau of Labor Statistics offers an alternative reading of the CPI called the CPI-E, which tracks a basket of goods weighted toward spending patterns of people aged 62 and older. It can diverge widely from the CPI-W, especially when shelter and medical care are increasing in price like they have the last few years.
A 2.66% COLA may seem low based on the actual costs retirees experience, not just what they feel. Indeed, the Senior Citizens League estimates Social Security benefits have lost about 36% of their buying power since 2000. due to higher real costs for retirees relative to the group tracked by the CPI-W.
While we still have several months before we get the definitive result on next year’s COLA, the number may still come as a bit of a surprise to seniors when it finally arrives.
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3 Reasons Retirees Could Be Surprised by the Most Recent 2025 Social Security Cost-of-Living Adjustment (COLA) Forecast was originally published by The Motley Fool
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