Rosalind Evans
Retirees are still feeling the impact of higher prices, but one buffer for the effects of inflation — the Social Security cost-of-living adjustment, or COLA — may be lower next year. As inflation moderates, the Social Security COLA for 2025 might be 3%, according to Mary Johnson, an independent Social Security and Medicare policy analyst. This estimate is lower than the 3.2% boost to benefits that more than 66 million beneficiaries saw starting in January. It is also substantially lower than the record 8.7% COLA in 2023 and the 5.9% COLA in 2022 in response to record-high inflation.
How the Social Security COLA is Calculated
The annual adjustments are based on a subset of the Consumer Price Index, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Every year, the Social Security Administration compares the third-quarter CPI-W data for that year with the previous year’s third quarter. If there is a percentage increase from one year to the next, that determines the COLA. However, if there is no increase, there is no COLA. Because it is still very early in the year, the Social Security COLA estimate may be subject to change.
Why Early COLA Estimates for 2025 Are Lower
A look at the latest CPI-W data helps show why the increase is down from the record-high increases retirees recently saw. Prices for specific categories saw a double-digit percentage decline compared with two years ago as of May. Fuel oil was down 35.3%; airline fares dropped 19.4%; and gasoline declined by 17.7%. This significant price drop contributes to the lower COLA estimates for the coming year.
Undercounting Real Senior Inflation
Many retirees coped with inflation by making adjustments, such as cutting back on savings or dipping into existing assets. “They take a big hit to their future wealth by doing that,” Laura Quinby, a senior research economist at the Center for Retirement Research, previously told CNBC.com. According to Quinby, the effects of Social Security’s cost-of-living adjustments vary for individuals based on their expenses and where they live.
Disparities in Measuring Retiree Spending
Some experts argue the CPI-W is not a perfect measure for retiree spending. For example, while the CPI-W assumes older adults spend about 66% of their income on housing, food, and medical costs, about 75% is devoted to those costs, according to Johnson. “This disparity suggests that my COLA estimate, which is based on the CPI-W, may be undercounting real senior inflation by more than 10 percent,” Johnson said. Nevertheless, the latest CPI-W shows where inflation is subsiding and rising — which may ultimately affect next year’s COLA.
As we look ahead to 2025, the expected lower Social Security COLA reflects the current economic conditions and the moderation of inflation. While this may relieve the Social Security program, retirees must remain vigilant in managing their finances amidst varying inflation impacts. Understanding these dynamics helps prepare for future financial planning and the potential changes in benefits.
