Social Security’s 2025 cost-of-living adjustment (COLA) looms as yet another lose-lose scenario

For most retirees, Social Security income is a financial foundation they would struggle to live without.

In 2022, 22.7 million people were lifted above the federal poverty line by this critical program, including 16.5 million adults age 65 and older, according to an analysis by the Center on Budget and Policy Priorities. If Social Security didn’t exist, the elderly poverty rate would be nearly four times higher — about 38.7 percent, compared to the current 10.2 percent.

Given how many retirees rely on Social Security to cover at least some of their expenses as they age, it should come as no surprise that the annual cost-of-living adjustment (COLA) reveal — which is scheduled for 8:30. am ET on October 10 — it’s the most anticipated of all the announcements.

While hopes are high for significantly bigger benefit checks in 2025, an unfortunate lose-lose scenario seems to be taking shape, once again.

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What purpose does the Social Security COLA serve and how is it calculated?

Social Security’s cost-of-living adjustment is tasked with keeping benefits on par with the prevailing rate of inflation. For example, if the price of a basket of goods and services that retirees buy regularly increases by 3%, Social Security benefits should, in a perfect world, increase by the same percentage to ensure that retirees do not they lose their purchasing power. COLA is the nearly annual increase in Social Security checks designed to keep up with inflation.

It’s certainly been a tale of two halves for Social Security’s COLA since the program’s inception. From January 1940, when the first retired worker benefit was mailed, until 1974, COLAs were arbitrarily assigned by special sessions of Congress. Only 11 COLAs were transmitted during this 35-year period, including none in the 1940s.

Beginning in 1975, the Consumer Price Index for Urban Wage and Service Workers (CPI-W) became the inflationary tool used to determine the COLA on an annual basis. The great thing about the CPI-W is that all of its spending categories have individual percentage weights. It is these weights that allow the index to be expressed as a single figure each month, making for quick and easy year-over-year comparisons to determine whether prices are rising (inflation) or falling (deflation) collectively.

Calculating your annual Social Security COLA is a lot easier than you might think. Although trailing 12-month (TTM) CPI-W readings are reported each month, only TTM readings from July through September (third quarter) are included in the COLA calculation. If the average CPI-W value in the third quarter of the current year increased from the comparable period of the previous year, inflation occurred and Social Security checks will increase the following year.

The year-over-year percentage increase in third quarter CPI-W average readings, rounded to the nearest tenth of a percent, determines the cost of living adjustment.

A sizable increase in the prevailing rate of inflation has resulted in three consecutive years of above-average COLAs. US Inflation Rate Data by YCharts.

Cost of living adjustment estimates for 2025 narrowed substantially

For most of the last 20 years, Social Security’s COLAs have been disappointing. There were three years in which deflation occurred and no COLA was administered (2010, 2011, and 2016), along with the lowest positive COLA in history (0.3% in 2017). Overall, the average COLA on a 20-year basis is a modest 2.6%.

However, the past three years have been outliers. A rapid increase in the US money supply during the COVID-19 pandemic pushed the headline inflation rate to levels not seen since the early 1980s. The result was COLA of 5.9% in 2022, 8.7% in 2023 and 3.2% in 2024. The 8.7% increase in 2023 was the largest in 41 years on a percentage basis and the largest in history relative to a previous year. -nominal growth of the dollar per year.

Although Social Security’s 2025 COLA estimates started at opposite ends of the spectrum, they have narrowed substantially and now effectively agree on what’s coming.

When the year began, the nonpartisan senior advocacy group The Senior Citizens League (TSCL) forecast a modest 1.4% COLA for 2025. But following July’s inflation report, TSCL’s 2025 COLA estimate stood at 2.57 %, which rounds to 2.6%.

Independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, has been handing out COLA predictions for years. Johnson’s 2025 COLA forecast started at a more robust 3.2% following the April inflation report, but has since fallen to 2.6% based on data from the July inflation report.

Based on the average Social Security check of $1,920.48 that was distributed to more than 51 million retired recipients in August, a 2.6 percent COLA would translate to about a $50 increase in monthly benefits in 2025. By comparison, the average disabled worker and The average survivor beneficiary is expected to see their respective monthly payments by $40 and $39 next year.

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Even if history is made, a lose-lose story is likely to play out for retirees

If TSCL and Johnson’s forecasts prove accurate, it would actually represent a historic moment. This would be the first time this century, or 28 years in total, since beneficiaries have enjoyed four consecutive years with COLAs of at least 2.6%. On a nominal dollar basis, a more robust Social Security check would be welcomed by most retirees.

Unfortunately, a similar lose-lose story seems to be unfolding, which will see the seniors get the short end of the stick, once again. Even if history is made, there is an extremely high probability that retirees will see the purchasing power of their Social Security income.

Compared to working-age Americans, seniors spend a higher percentage of their monthly budgets on housing and health care costs. Since the July inflation report, the TTM inflation rate for shelter and nursing services has been considerably higher than 2.6%. Since the CPI-W taps into the spending habits of “urban wage earners and service workers,” the expenses that matter most to seniors are not given the proper weight for the COLA calculation.

A study published by TSCL in July estimates that the purchasing power of Social Security income has fallen 20 percent since 2010. A 2.6 percent COLA in 2025 would likely perpetuate this loss of purchasing power.

In addition to an apparently persistent loss of purchasing power, most retirees will say goodbye to some or all of their 2025 COLAs due to another big increase in Medicare Part B premiums.

Medicare Part B is the segment of Medicare responsible for outpatient services. Most seniors age 65 and older (65 is the qualifying age for Medicare) who receive a Social Security benefit automatically have their Part B premiums deducted from their monthly payments.

In May, the Medicare Administrators Report projected that Part B premiums would rise 5.9 percent to $185 a month next year, from $174.70 a month in 2024. That would mark the second straight year of of a 5.9% increase in Part B premiums and it almost certainly will. to limit the impact of the 2025 Social Security COLA for most beneficiaries.

Between a steady loss of purchasing power for Social Security income and rapidly rising Part B premiums eating into their COLAs, retirees can’t catch a break.