Social Security's 2025 Cost of Living Adjustment (COLA) Is Likely to Disappoint: Here's What All Retirees Need to Know Before Oct. 10

Almost 70 million Americans will receive a total of $1.5 trillion in benefits from Social Security this year. The program's checks are a key source of income for a majority of U.S. retirees. For some, they're a financial lifeline: One in seven recipients relies solely on them for income.

As such an important part of millions of Americans' financial lives, the benefits must keep pace with inflation. As the cost of living goes up, benefits have to rise too, or retirees would have to continually make do with less until those payments became essentially worthless. Would you consider retiring on $22.54 per month? That's how much the program's first check -- check number 00-000-001 -- was made out for when it was cut in 1940.

Thankfully, the law that underpins Social Security now accounts for inflation: Each year, the program tracks inflation during the third quarter, and based on the reading, determines a cost of living adjustment (COLA) for the next year. The 2025 COLA will be announced on Oct. 10 before going into effect in January.

COLAs weren't always a guarantee

Before 1975, in order for benefits to be raised, legislation had to be passed. As you might imagine, this led to issues. There were large stretches of years when Congress didn't raise benefits. By the early 1970s, however, in the midst of terribly high inflation -- even higher inflation than what the country saw in 2022 and 2023 -- Congress acted to make the process for annual increases automatic, creating the modern COLA.

Now, every autumn, the Social Security Administration (SSA) calculates a new COLA based on the inflation numbers from July, August, and September. The SSA looks specifically at a number from the Bureau of Labor Statistics called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

2025's COLA might fall short, and it's not just this year

Here's the problem: Do you notice anything odd about the CPI-W, at least in the context of retirement? The CPI-W measures changing costs for wage earners and clerical workers, but retirees have different spending priorities, needs, and habits than people in the workforce. Think about how much more a senior citizen spends on healthcare than a younger worker -- and healthcare costs have long been rising faster than the average prices in other categories.

As far back as the 1980s, there was an awareness the CPI-W was a bit of a square peg in a round hole. Congress directed the BLS to create an index that more accurately gauged inflation for the elderly, which led to the Experimental Price Index for the Elderly (CPI-E). The CPI-E places a heavier emphasis on healthcare costs relative to other categories in order to better reflect the reality of what retired Americans are spending their money on. Unfortunately, it is still imperfect as it is just a different balancing of the same items that go into the market basket used to calculate the CPI-W. It uses the same retail outlets, locations, and items, rather than an entirely new set designed from the ground up for seniors.

In more years than not, the CPI-E is higher than the CPI-W by a fraction of a percent. For example, in 2024, retirees got a 3.2% COLA. It would have been 4.0% if it had been based on the CPI-E. That gap may feel insignificant, but remember the power of compounding. Over time, small differences in annual growth rates can really add up. The Senior Citizens League (TSCL), an advocacy group, estimates Social Security checks have lost more than 30% of their purchasing power since 2000. That's not insignificant.

The 2025 COLA is probably going to be less than retirees hope

The SSA will announce the COLA for 2025 on Oct. 10. With inflation continuing to ease, the COLA will likely fall around 2.5%, down from recent years but more in line with the historical norm. This is unlikely to provide too much comfort to the millions of retired Americans feeling the pinch of rising costs on their fixed budgets. A TSCL survey found 63% of seniors are worried their income won't be enough to cover essentials like food and housing.

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