Updated Social Security Cost-of-Living Adjustment (COLA) forecast may surprise retirees

In early 2022, when inflation reached levels not seen in decades, the Federal Reserve began to steadily increase the Federal Funds Rate (FFR) to slow the movement of money through the economy and bring down prices. As prices surged, the Social Security Administration (SSA) offered beneficiaries a Cost-of-living adjustment (COLA) of 8.7 percent in 2023 and one worth 3.2 percent in 2024. The annual COLA is meant to protect beneficiaries’ purchasing power, but that mission is much more challenging in a high-inflation environment.

Since rate hikes began, prices for some goods have fallen, but in many cases, the pace of the increase has slowed rather than reversed. In other words, prices have continued to rise at a slower rate than that recorded in 2022. In March, the Bureau of Labor Statistics reported a 0.4 percent increase in the Consumer Price Index (CPI), on top of the 0.4 percent increase recorded in February. At that time, the February increase was the highest monthly increase since September 2020.

Although it may be discouraging news for those on a fixed income who rely on SSA benefits, if the current trend continues, beneficiaries could receive a higher COLA in 2025 than the one added to their benefits this year. Since the 2024 COLA was calculated, average prices have risen 1.4 percent. This year alone, prices have increased by over one percent, and at this pace, the 2025 COLA could exceed that offered to beneficiaries this year.

The SSA calculates the COLA using the BLS’ CPI for Urban Wage Earners and Clerical Workers (CPI-W). To determine the COLA, the SSA compares the CPI-W for the third quarter of the year (July, August, and September) before the CPI-W for the current year’s third quarter. It will be announced in mid-October.

The purchasing power of seniors is under threat

There are still a few months until the announcement, meaning the 2025 COLA forecast could change. While beneficiaries would appreciate a large 2025 COLA, the fact that it will not be applied to benefits until January of next year means deflation could provide more significant relief. Each year, after the COLA is applied to benefits, there are usually only small price fluctuations. However, in a high-inflation environment, a one-time benefit increase can put beneficiaries in a difficult position. Inflation cuts into their buying power, causing their purchasing power to decrease and making it harder for them to afford the things they need. This reduction in purchasing power can harm seniors’ health, who forgo meals and ration medication because they cannot afford their grocery and medical bills.