The 2025 Social Security Cost of Living Adjustment (COLA) is coming. Will it be enough for retirees?

Social Security is one of the most critical — and expensive — functions of the federal government. The Social Security Administration (SSA) distributes approximately $1.5 trillion a year to 68 million Americans, 51 million of whom are retired workers.

Nearly 40 percent of these retirees rely on SSA payments for at least half of their income, and about 13 percent of beneficiaries rely almost exclusively on them. The financial health of millions of Americans rests heavily on the shoulders of Social Security.

Retirees can count on cost-of-living adjustments to their benefits

Whether or not Social Security benefits play a major role in your retirement, you may wonder how inflation will affect your benefits. As costs rise, will you be forced to tighten the proverbial belt? Fortunately, each year the SSA adjusts payments to reflect changing costs with the intent of keeping retirees’ standard of living constant. This is known as the annual cost of living adjustment (COLA), and it’s a big deal for many retirees.

In the early days of Social Security, any benefit adjustments had to go through Congress. That meant constant political battles and huge periods of time where no adjustments were made. Fortunately for today’s retirees, an automatic adjustment was instituted in 1975. Since then, almost every year has seen a slight increase in benefits.

This COLA is linked to a specific measure of inflation, the Consumer Price Index for Urban Wage and Service Workers (CPI-W). This CPI-W number is calculated and reported by the US Bureau of Labor Statistics (BLS) monthly. The BLS uses a lot of data points to try to track inflation across the economy and boil it down to one number.

There is some controversy over whether this is the best indicator to use and how closely it truly reflects the rising costs faced by retirees, but it has been used faithfully for nearly 50 years.

With inflation on everyone’s mind, retirees are eager to find out this year’s COLA

Although it has cooled over the past year, many Americans are still feeling the impact of inflation from the worst of the coronavirus pandemic. In 2021 and 2022, it was at levels not seen in decades. Social Security adjustments in both years reflected this circumstance, with COLAs of 5.9% and 8.7% in 2021 and 2022, respectively. Both were the highest since the early 1980s.

These look like great adjustments, but here’s the thing — CPI-W may not be the best value to use. It is designed to track the habits of people who are younger and still working. Retirees have different spending needs and priorities. Perhaps the most obvious difference is medical care. This is a comparatively much larger part of a retiree’s budget and an area of ​​the economy that often experiences higher than average inflation.

The CPI-W does not account for such differences. So despite the annual COLA, retirees could effectively lose purchasing power. The latest analysis by The Senior Citizens League (TSCL) found that retirees have lost 20 percent of their purchasing power in Social Security benefits since 2010.

The announcement is coming soon, but we can still make a prediction

If the TSCL is correct, any COLA to come probably won’t make up for the lost purchasing power. Still, any bump is better than no bump. So when will we know what the 2025 adjustment will be? The annual COLA is announced in October, so you’ll have to wait another month for the official number.

However, it is calculated using July, August and September CPI-W numbers. Since two of these issues have been released, we have a pretty good idea of ​​what the final issue will be. The latest TSCL estimate is 2.5%, down from 3.2% last year. The official number will be here soon enough, but it’s not likely to deviate too much from that estimate.