Key Takeaways
The eagerly awaited announcement regarding Social Security’s cost-of-living adjustment (COLA) for 2025 is set for the morning of October 10.
Initial forecasts for the 2025 COLA varied widely, but they have recently aligned, providing a clearer picture of what beneficiaries might expect.
Despite the potential for a substantial COLA, many retirees may still feel that the adjustment won’t fully alleviate the impact of inflation.
Social Security is a crucial income source for most retirees, and the upcoming COLA could represent a historic moment, albeit one that may lead to disappointment.
Over the past 23 years, polling by Gallup has shown that at least 80% of retirees rely on their Social Security checks for their financial needs, with 88% in 2024 indicating it is a “major” or “minor” income source.
Given the importance of Social Security in providing financial security for seniors, it’s no wonder that the upcoming COLA announcement is highly anticipated.
Understanding the Purpose of Social Security’s COLA
The COLA is the mechanism used by the Social Security Administration (SSA) to adjust benefits annually based on the rising costs of goods and services. For instance, if prices increase by a certain percentage, benefits are expected to rise by a similar amount to maintain purchasing power.
Historically, adjustments were arbitrary until 1975, when the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was adopted to track inflation and determine COLA. Only CPI-W readings from July to September impact the calculation.
Recent COLA Forecasts for 2025
Over the past two decades, the average COLA has been a modest 2.6%, with some years seeing no adjustment at all. However, recent years have seen significant increases due to rising inflation, with COLAs of 5.9% in 2022 and 8.7% in 2023.
As of now, forecasts for the 2025 COLA have narrowed. The Senior Citizens League (TSCL) initially predicted a modest increase of 1.4%, which has since risen to 2.57%, rounding to 2.6%. Similarly, analyst Mary Johnson has adjusted her forecast downward to 2.6%.
For nearly 68 million beneficiaries, a 2.6% COLA would result in an average increase of about $46.35 per check, based on a July 2024 average payout of $1,782.74.
A Historic Yet Disappointing Adjustment
If the 2.6% COLA prediction holds true, it would be the smallest percentage increase in four years. While this may seem underwhelming, it would still match the average COLA over the past two decades and represent the first time since 1997 that Social Security’s COLA has consistently reached at least 2.6% over four years.
However, two significant concerns remain. First, even with an increase, retirees may face a decline in purchasing power, a trend that has persisted since the early 2000s. Studies show that the buying power of Social Security benefits has significantly decreased over the years, particularly for essential costs like housing and healthcare.
Secondly, rising Medicare Part B premiums, projected to reach $185 in 2025 (a 5.9% increase), will further erode the benefits of the COLA, as these premiums are typically deducted directly from Social Security payments.
In summary, while the 2025 COLA may set a new record, it also brings with it a sense of disappointment for many retirees.