In June, Social Security's more than 51.1 million retired-worker beneficiaries took home an average check of $1,918.28, which works out to a little over $23,000 on an annualized basis. While Social Security isn't going to make its recipients rich, it is a program that most retirees lean on to cover at least some portion of their expenses.
Over the last 23 years, national pollster Gallup has been surveying retirees to gauge their reliance on America's top retirement program. Over this time line, between 80% and 90% of retirees have leaned on their Social Security income , in some capacity, to make ends meet, including 88% of respondents in 2024.
For Social Security beneficiaries, nothing is more important than the cost-of-living adjustment (COLA) reveal during the second week of October. Although COLA estimates have varied quite a bit over the last six months, it's looking increasingly likely that a history-making "raise" is in order for the upcoming year .
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What is Social Security's COLA, and why is it so important?
The price of the goods and services we purchase changes over time, which means Social Security benefits also need to adjust to ensure that beneficiaries don't lose purchasing power. Social Security's cost-of-living adjustment is the mechanism that aims to keep benefits on par with the prevailing rate of inflation. Think of it as an annual "raise" but with the noted quotation marks, since it's not designed to outpace inflation, which is something that could happen with a raise from an employer.
From the mailing of the first retired-worker benefit check in January 1940 through 1974, Social Security's COLAs were completely arbitrary and determined by special sessions of Congress. A total of 11 benefit adjustments were made during this span , with no COLAs passed along during the entirety of the 1940s.
Starting in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the inflationary measure used to calculate Social Security's COLA on an annual basis. The CPI-W has over a half-dozen major spending categories and a long list of subcategories, all of which have their own respective percentage weightings. The benefit of these percentages is that is allows the CPI-W to be expressed as a single figure, which makes for easy year-over-year comparisons to determine if prices are collectively rising ( inflation ) or declining (deflation).
Although the CPI-W is reported monthly by the U.S. Bureau of Labor Statistics, only the trailing-12-month figures from the third quarter (July through September) factor into the final COLA calculation. If the average CPI-W reading from the third quarter of the current year is higher than the average CPI-W reading from the comparable period in the previous year, inflation has occurred and beneficiaries are due a "raise."
For the curious, the amount of the "raise" is equal to the year-over-year percentage increase in average Q3 CPI-W, rounded to the nearest tenth of a percent.
A period of above-average inflation has lifted Social Security's COLAs over the last three years. US Inflation Rate data by YCharts .
The 2025 cost-of-living adjustment forecast has shifted but is still on pace to make history
Over the last two decades, Social Security COLAs have been mostly unimpressive. The average COLA over the last 20 years is 2.6%, which includes three years when no COLA was passed along (2010, 2011, and 2016), as well as the smallest positive COLA in history (0.3% in 2017).
However, the last three cost-of-living adjustments have bucked this trend. In 2022, 2023, and 2024, Social Security's COLAs respectively came in at 5.9%, 8.7%, and 3.2%. The 8.7% COLA in 2023 marked the largest percentage increase in 41 years . Suffice it to say, beneficiaries are hoping for a continuation of this streak of above-average COLAs.
Forecasts for Social Security's 2025 COLA have changed rapidly in recent months. Nonpartisan senior advocacy group The Senior Citizens League (TSCL) has seen its forecast for Social Security's 2025 cost-of-living adjustment nearly double from where things began earlier this year:
- TSCL's 2025 COLA estimate in January 2024 : 1.4%
- February 2024 : 1.75%
- April 2024 : 2.6%
- May 2024 : 2.66%
- June 2024 : 2.57%
- July 2024 : 2.63%
By comparison, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, has seen her 2025 COLA forecast shrink recently:
- May 2024 : 3.2%
- June 2024 : 3%
- July 2024 : 2.7%
Regardless of whether Social Security's 2025 COLA were to come in at 2.6% or 2.7%, it would make history. It's been 28 years since the program's COLA totaled at least 2.6% in four consecutive years . If Johnson's forecast proves accurate, it would mark the first time in 32 years we've witnessed four consecutive COLAs of at least 2.7%!
Based on these forecasts, the average retired-worker beneficiary can expect an extra $50 to $52 per month come 2025 .
Comparatively, workers with disabilities and survivor beneficiaries are on track to see their monthly payouts increase by $40 to $42 and $39 to $41, respectively.
Image source: Getty Images.
Social Security COLAs have proven inadequate for retirees
On paper, it appears as if beneficiaries will receive an above-average COLA for a fourth consecutive year. Unfortunately, these percentages mask the reality that Social Security's cost-of-living adjustments have done a poor job of measuring the inflation seniors are contending with.
In May 2023, TSCL released an analysis that compared aggregate COLAs since the beginning of the century (through February 2023) to the cumulative price change for a basket of goods and services purchased by the typical retiree. While aggregate COLAs increased benefits by a total of 78% since the century began, the basket of goods and services increased in value by 141.4%. The end result was a 36% loss of purchasing power for a Social Security dollar .
Last week, TSCL updated and narrowed its purchasing power calculations. Its analysis showed that the prevailing inflation rate has outpaced Social Security's COLA in 10 of the last 15 years. All told, the purchasing power of Social Security income has declined by 20% since 2010.
The prevailing issue is that the CPI-W isn't tracking the expenses that matter most to seniors -- and seniors (aged 62 and over) comprise 86% of Social Security's beneficiaries.
As its full name suggests, the CPI-W tracks the spending habits of "urban wage earners and clerical workers." These are usually working-age Americans who aren't currently receiving a Social Security benefit. More importantly, these are folks who spend their money differently than retirees.
Seniors spend a disproportionately higher percentage of their monthly budget on shelter expenses and medical care services than working-age Americans. However, these key costs aren't being given the proper weighting within the CPI-W.
To make matters worse, the two most-important expenses for seniors -- shelter and medical care services -- sport trailing-12-month inflation rates that are considerably higher than the 2.6% or 2.7% Social Security COLA forecast for 2025 .
Regardless of which COLA forecast ends up being more accurate, retirees are likely staring down another year when their Social Security income loses buying power .
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