The Social Security Cost of Living Adjustment (COLA) forecast for 2025 has just been updated. The bad news may surprise retirees.

Social Security recipients receive an annual cost of living adjustment (COLA) to protect the purchasing power of benefits from inflation. But The Senior Citizens League (TSCL), one of the largest nonprofit senior advocacy groups in the U.S., estimates that the purchasing power of benefits has fallen 20 percent since 2010. “COLAs have become less and less likely to hold keeping pace with inflation over time,” TSCL wrote in a recent press release.

That’s surprising because Social Security recipients have received relatively large COLAs in recent years: 5.9% in 2022, 8.7% in 2023 and 3.2% in 2024. Until then, COLAs had not exceeded 3% since 2012. But more than two-thirds of Social Security Recipients surveyed by TSCL said the most recent COLA failed to cover the increase in household expenses.

As a result, many retired workers face financial difficulties. Fewer than 50 percent believe they have enough money to live comfortably through retirement, and nearly 90 percent are concerned that inflation will reduce the value of their savings, according to the 2024 US Retirement Survey from investment manager Schroders.

Against this backdrop, Social Security recipients may be surprised to learn that TSCL recently revised its 2025 COLA forecast to 2.5%, the smallest increase since 2021. Here are the important details.

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Social Security recipients will likely receive the lowest COLA in 2021

Since 1975, Social Security benefits have been adjusted annually based on how inflation changes in the third quarter of each year, the three-month period between July and September. Specifically, cost of living adjustments (COLAs) are tied to a subset of the consumer price index known as the CPI-W.

The math is simple: the current year’s third quarter CPI-W is divided by the prior year’s third quarter CPI-W, and the percentage increase becomes the following year’s COLA. That means the Social Security Administration can’t calculate the official 2025 COLA until the September CPI-W data is available, which won’t happen until October 10, 2024.

However, CPI-W inflation trended downward from 2.9% in January to 2.4% in August, so The Senior Citizens League (TSCL) expects benefits to rise by 2.5% in 2025. The last time Social Security benefits received a sub-3% COLA was 2021. This may worry retired workers, especially those in financial difficulty, but a lower COLA itself is not the real problem.

Social Security benefits will likely lose more purchasing power in 2025

The real problem with a lower COLA in 2025 is how it is calculated. The CPI-W measures inflation based on the spending patterns of office workers and hourly wage earners. People in these categories are usually younger than Social Security recipients, and young people tend to spend money differently.

Most importantly, Social Security retirees tend to spend more on housing and health care. So, from their perspective, the CPI-W underrepresents the importance of those spending categories. This is problematic because the CPI-W rose 2.4% in August, but costs associated with housing and health care rose 4.3% and 3.3%, respectively.

So what we have is above-average inflation in underrepresented spending categories. This means that the CPI-W underestimates the impact of inflation on retired workers. We can strengthen our case by checking the CPI-E, a subset of the consumer price index that measures inflation based on the spending patterns of people age 62 and older, a group that aligns more closely with the average Social Security recipient.

CPI-E increased by 2.9% in August. That puts it half a percentage point above the CPI-W, which rose 2.4%. This supports the idea that the CPI-W is an inaccurate indicator of inflation for retired workers. And if the current trend continues, the 2025 COLA will likely be half a percentage point too low, meaning Social Security benefits will lose purchasing power next year.

Unfortunately, Social Security recipients have few recourse options beyond prudent budgeting and part-time work. However, two sources of supplemental income worth considering are high-yield savings accounts and certificates of deposit (CDs). Interest rates are at their highest level in decades, so retirees who stash money today should find themselves with a little extra cash in the future.