In May, 51 million retired workers received an average Social Security check of $1,916.63, or about $23,000 a year. While this may not seem like much, many retirees rely heavily on this money to cover their expenses. For over 20 years, surveys have shown that 80% to 90% of retirees depend on Social Security as a key source of income. Because of this, the annual cost-of-living adjustment (COLA) is very important to them.
What is COLA?
Social Security’s COLA helps adjust benefits to keep up with inflation. Think of it like a basket of goods and services that seniors regularly buy. If the prices of these items go up, benefits should increase too, to help seniors maintain their purchasing power. COLA is the tool that makes sure benefits increase with inflation.
For 35 years after the first Social Security payment in 1940, COLAs were given out randomly by Congress. From 1940 to 1975, there were only 11 adjustments.
In 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) started being used for annual inflation adjustments. The CPI-W tracks changes in prices for goods and services, and the Bureau of Labor Statistics (BLS) reports it every month.
The COLA for the upcoming year is determined by the average CPI-W readings from July to September. If the average CPI-W for these months is higher than the previous year’s, benefits go up. The percentage difference between these readings, rounded to the nearest tenth of a percent, determines the COLA.
Historical Context
For 51 million retired workers, the 2025 Social Security COLA could be significant. While it’s not expected to be a huge increase, it could be something last seen in 1997.
In June, the BLS released the May inflation report, showing a 3.3% increase in the CPI-W over 12 months. This led the Senior Citizens League (TSCL) to forecast a 2.57% COLA for 2025, down from an earlier 2.66% forecast. Over the last 20 years, the average COLA has been 2.6%.
Despite recent boosts, COLAs have been inconsistent since 2000. Deflation led to no COLAs in 2010, 2011, and 2016, and the 2017 COLA was just 0.3%. Since 2000, there have been 11 years with COLAs of 2% or lower. However, recent years have seen larger increases: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. The 8.7% COLA in 2023 was the highest in 41 years.
If TSCL’s forecast holds, a 2.6% COLA in 2025 would mean the first four-year streak of COLAs at or above 2.6% since 1997. For the average retired worker, this would mean an additional $50 per month. Disabled workers and survivor beneficiaries could expect increases of $40 and $39, respectively.
Insufficient Adjustments
While a four-year streak of decent COLAs might be celebrated, seniors continue to face challenges. In May 2023, TSCL found that from January 2000 to February 2023, aggregate COLAs increased by 78%, but the price of goods and services for seniors rose by 141.4%. This means the purchasing power of Social Security dollars has dropped by 36%.
The CPI-W is partly to blame. It tracks spending habits of urban wage earners and clerical workers, not seniors. Seniors spend more on shelter and medical care, which have seen high inflation rates: 5.4% for shelter and 3.1% for medical care as of May 2024.
Shelter inflation remains high due to rising mortgage rates, while medical care services inflation has increased recently. The CPI-W doesn’t adequately account for these expenses, leading to a decline in Social Security’s purchasing power. A 2.6% COLA in 2025 is unlikely to change this trend significantly.
Maximizing Social Security
If you’re behind on retirement savings, some “Social Security secrets” could boost your retirement income. For example, one trick could pay you as much as $22,924 more annually. Knowing how to maximize your Social Security benefits can help you retire with confidence.
Staying informed about Social Security changes is crucial for retirees and future retirees. Understanding the COLA adjustments, historical context, and spending challenges can help you plan better. Despite the challenges, knowing how to maximize your benefits and stay updated with changes can help you secure a more stable financial future.
FAQs
1. What is COLA, and how does it affect my Social Security payments?
COLA stands for Cost of Living Adjustment. It increases Social Security payments to help keep up with rising costs. In 2025, the COLA is expected to be around 2.6%.
2. How is the COLA determined?
The COLA is based on the average CPI-W readings from July to September of the previous year. If these readings are higher than the year before, benefits go up.
3. Why are recent COLAs higher than before?
Recent COLAs have been higher due to significant increases in inflation rates, especially for goods and services that seniors buy.
4. Why is Social Security’s purchasing power declining?
The CPI-W, which determines COLA, doesn’t accurately track the spending habits of seniors, especially for shelter and medical care, leading to reduced purchasing power.
5. How can I maximize my Social Security benefits?
You can maximize your benefits by understanding the rules and strategies for claiming Social Security, such as delaying benefits or understanding spousal benefits.
Not sure what I’m making a comment on i hope its the 2025 Cola increase at 2.6 or if it can make it up to 3.whatever is BS You really think that a 39 to 40 dollar increase is going to make any difference. Hell no you try living on 1300 a month
Biden is not going to give retired people their money that they need to survive in this world 🌎. That money is going to go to the wars he starts like Ukraine and China. When the government doesn’t give Biden any money he takes it from the people tax returns, social security, and any extra money people expecting to receive. They will not see it. People gonna start seeing their money when Trump takes the office because he doesn’t lie and steal. He doesn’t have reason he’s rich already.