Retirees believe that Social Security’s cost-of-living adjustment calculation does not reflect seniors’ expenses. Are they right?

Social Security’s 3.2 percent cost-of-living adjustment (COLA) for 2024 was disappointing for many seniors, and the 2025 COLA is on track to be even more disappointing. Nearly two-thirds of Social Security-dependent retirees see COLAs as insufficient and say they’ve helped very little with key expenses, according to a recent poll by The Motley Fool.

More than 4 in 5 said the COLA does not reflect the financial situation of retirees. It goes back to the unusual way the Social Security Administration calculates COLA. But things may not stay this way forever.

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The Social Security COLA is not based on seniors’ expenses

The government calculates the Social Security COLA by looking at the annual change in average inflation data from the third quarter of the Consumer Price Index for Urban Wage and Service Workers (CPI-W). This index measures the cost of a basket of popular goods and services, including food and personal care products, over time.

The problem with this method is that the CPI-W looks at the spending habits of workers rather than retirees. To be included in this index, a household must live in an urban metropolitan area, have at least half of its income come from service or wage occupations, and have at least one household member employed for at least 37 weeks in the last 12 weeks. Monday. That, by default, excludes households where all members are retired.

It may not seem like much, but the spending habits of these workers are much different than those of senior citizens. We know this because the government tracks seniors’ spending with the Consumer Price Index for the Elderly (CPI-E).

The nonpartisan Senior Citizens League (TSCL) conducted an analysis that revealed that COLAs would have been higher in seven of the last 10 years if the government had used the CPI-E to calculate them instead of the CPI-W. This would have resulted in $2,689.20 in additional benefits for the average Social Security recipient during this time.

Is a change possible?

Many have called for the government to change the COLA calculation to use CPI-E data rather than CPI-W data, but that’s easier said than done. Social Security is currently facing a funding crisis, with the program’s trust funds expected to run out in 2035. After that, it will only be able to pay 83 percent of scheduled benefits unless the government increases its funding.

Until they resolve this solvency issue, Congress will not approve the move to CPI-E, as it could accelerate the depletion of trust funds. It could change the COLA calculation along with other changes to ensure the long-term stability of Social Security. But we have no idea when that might happen or what the government’s solution might look like. Seniors may still see some benefit cuts.

In the meantime, all retirees can do is plan their finances carefully to make the most of the Social Security benefits they have. We are about a month away from the announcement of the 2025 Social Security COLA. When it comes out, recipients will be able to estimate what their checks will look like next year. The government will also issue personalized COLA notifications in December.

If you’re receiving Social Security benefits, once you know what your new monthly check will look like, you’ll know how much of your expenses you’ll have to cover yourself, what spending cuts you’ll have to make, or how much more of your savings . of pension you will have to touch.