Here’s how Social Security’s 2025 COLA projections compare to the past 50 years, and why retirees may not be thrilled

There are a few words that consumers hate, and “inflation” is usually one of them. It only takes a walk into a convenience or retail store to realize that these days, a dollar doesn’t go as far as it used to a few years ago.

From an economic point of view, inflation is generally seen as better than deflation, but that does not diminish its effects on the common man. This is especially true for people on a fixed income, such as many Social Security recipients. Fortunately, Social Security has a cost of living adjustment (COLA) designed to help offset some of the effects of inflation.

The official Social Security COLA numbers won’t be released until October, but it’s never too early to start thinking about a possible range they could fall into. Unfortunately, current COLA estimates likely won’t send retirees jumping for joy compared to the past five decades. Let’s take a look at why.

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How does Social Security determine what the COLA will be

Social Security decides the COLA using a single measure: the Consumer Price Index for Urban Wage and Service Workers (CPI-W). It is a monthly value that takes into account household items, transport, food and grocery costs and other relevant expenses. Below are examples of specific items to consider:

• Household items: toilet tissue, cleaning products and detergent.
• Transport: gas, public transport fares and vehicle maintenance.
• Food and food products: vegetables, bread, milk.

The CPI-W is based on the expenditures of families living in urban areas where more than 50% of family income is obtained from service (office) or hourly wage occupations. According to the US Department of Labor, this is about 32% of the US population.

Social Security averages the CPI-W data for the third quarter months (July, August, and September) and compares it to the previous year’s data to determine the following year’s COLA. For example, if the average CPI-W for one year is 200 and then 205 the following year, the COLA would be set at 2.5% because the 5-point change is 2.5% of the original 200.

If the CPI-W data for a year is lower than the previous year, Social Security will not reduce monthly benefits; they will remain the same. For example, if the average CPI-W for one year is 205 and then 200 the following year, the COLA would be set at 0% instead of being reduced by 2.5%.

Social Security COLA projections for 2025

The Senior Citizens League (TSCL) is a senior advocacy group known for its COLA forecasts. The group’s predictions are far from certain and have been off from time to time, but they can give retirees a general idea of ​​what to expect and help them start their financial planning.

In its latest forecast, released on August 14, TSCL projects the 2025 COLA to be 2.57%, down from the 2.63% projected in July. Since Social Security COLAs only go over one decimal place, let’s meet in the middle at 2.6% in both cases.

How COLA 2025 compares to the last 50 years

A COLA of 2.6% would be the lowest since 2021. The good news is that it means inflation has cooled in recent years. The bad news is that it would be the lowest COLA since 2021. It’s kind of a bittersweet compromise. A 2.6% increase would also be lower than the 3.4% average since COLAs were implemented automatically starting in 1975. To give you a little more perspective, here are the five biggest 1975 COLAs.

Source: Social Security Administration.

On the other hand, here are the five lowest COLAs since 1975.

Source: Social Security Administration.

A 2.6% COLA wouldn’t be the worst thing in the world, but it’s fair to say that many Social Security recipients would also appreciate a higher number. In either case, it’s better to prepare now for a more modest increase than to be caught off guard when the official number is released in October.