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Why a smaller COLA increase wouldn’t be such a bad thing for Social Security beneficiaries
Experts are predicting a smaller cost-of-living adjustment for 2025 than in previous years - but a smaller bump in benefits wouldn’t actually be such bad news.
Each year, recipients of Social Security benefits have the potential to see their payments rise, as a result of the cost-of-living adjustment (COLA) calculated by the Social Security Administration (SSA). Introduced in 1975, the COLA seeks to prevent beneficiaries’ spending power from being eroded by inflation.
Who receives Social Security benefits?
Recipients of benefits include retired workers, disabled workers and surviving relatives of deceased Social Security recipients. The SSA’s list of benefits also includes the Supplemental Security Income (SSI), a scheme for people with little or no income who are over 65 or have a disability.
How is the COLA calculated?
The COLA is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) - an inflation indicator which is put together by the Department of Labor’s Bureau of Labor Statistics (BLS).
According to the BLS, the CPI-W is “a monthly measure of the average change over time in the prices paid by urban wage earners and clerical workers for a market basket of consumer goods and services”
To determine each year’s COLA, the SSA compares the CPI-W for the third quarter of the previous year with the CPI-W for the third quarter of the current year. If the indicator shows that the cost of living has gone up, a COLA is applied to reflect the percentage increase between the two points in time.
Announced in October 2023, the COLA for 2024 was calculated at 3.2%. For retired workers, this translated into an average monthly payment that rose from $1,848 to $1,907.
How big will COLA be in 2025?
Although there are still months to go until the 2025 COLA is confirmed - it is usually announced in October - experts are already offering projections of what the increase will look like, based on the CPI-W data that has been made available so far. And it appears that the adjustment will be lower than this year’s.
Alex Moore, a Social Security and Medicare statistician for the Senior Citizens’ League, estimates that next year’s COLA will be 2.63%.
Why this wouldn’t be such bad thing
While such a percentage would lead to a smaller increase in Social Security payments than in previous years, it wouldn’t actually be bad news.
As mentioned above, the purpose of the COLA is to ensure that the spending power of Social Security beneficiaries keeps pace with the rate of inflation - to avoid a situation where they can no longer afford their day-to-day costs.
Given that the COLA is calculated based on inflation data, a smaller adjustment would mean that the prices of goods and services is rising at a slower rate. So, although recipients of benefits may not receive as great a pay increase as in recent years - the COLA for 2023, for example, was 8.7% - they may also find that their daily expenses haven’t risen significantly, either.
If the 2025 COLA ends up being larger than this year, that will lead to larger Social Security cheques - but will ultimately represent a negative outcome, as it will signify that inflation has trended upwards in the US since late 2023.