Here’s Why Social Security’s Cost-of-Living Adjustment Could Be Lower in 2025
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Retirees are still feeling the impact of expensive.
However, a buffer for the impact of inflation — Social Security Cost of Living Adjustment — may be lower next year.
According to the latest estimate by Mary Johnson, an independent Social Security and Medicare policy analyst, when inflation eases, Social Security’s COLA in 2025 could be 3%.
That estimate is lower. 3.2% increase in benefits which more than 66 million beneficiaries have seen since January. This is also significantly lower than the record 8.7% COLA rate that COLA beneficiaries achieved in 2023 and the 5.9% COLA rate that took effect in 2022 to cope with record high inflation.
How to Calculate Social Security COLA
The annual adjustment is based on a subset of the Consumer Price Index, called the Consumer Price Index for Urban and Clerical Workers, or CPI-W.
Annual, Social Security Administration Compare the CPI-W data for the third quarter of that year to the third quarter of the previous year. 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.
Since it’s still early in the year, Social Security COLA estimates are subject to change.
Why the initial COLA estimate for 2025 is lower
A look at the latest CPI-W data helps see why this increase is lower than the record gains retirees have seen recently.
Prices for certain commodities fell by double digits compared to two years ago through May. Fuel oil prices fell 35.3%; airfares fell 19.4%; and gasoline prices fell 17.7%.
‘Undercounting real inflation for seniors’
Many retirees have responded to inflation by making adjustments, such as cutting back on savings or using existing assets, according to the Center for Retirement Research at Boston University.
“They would suffer a huge loss in their future wealth if they did,” said Laura Quinby, senior research economist at the Center for Retirement Research. previously told CNBC.com.
According to Quinby, the impact of Social Security’s cost-of-living adjustment will be different for each individual based on their personal expenses and where they live.
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Some experts say the CPI-W isn’t a perfect measure of retiree spending. For example, while the CPI-W assumes seniors spend about 66 percent of their income on housing, food, and medical expenses, in reality, about 75 percent of their income goes toward those expenses, according to Johnson.
“This discrepancy suggests that my COLA estimate, based on the CPI-W, may be more than 10 percent below actual inflation for seniors,” Johnson said.
However, the latest CPI-W shows where inflation is falling and rising — which could ultimately affect next year’s COLA.
