Now that we're into the month of August, we're closer to finding out what 2025's Social Security cost-of-living adjustment (COLA) will amount to. Of course, we'll still need to sit tight for a couple more months until inflation data from August and September is gathered. That, coupled with data from July, will be used to run the numbers for an official COLA announcement in October.
However, initial estimates point to a 2.63% Social Security COLA for 2025 . And since that's lower than 2024's 3.2% COLA, it's easy to see why seniors may be gearing up for disappointment.
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But a 2.63% COLA, or anything in that vicinity, won't be the smallest Social Security raise on record. In fact, it may surprise you to learn just how stingy some past Social Security COLAs have been.
COLAs can go as low as 0%
Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When there's a year-over-year rise in the index, Social Security benefits get a boost.
But that doesn't always happen. The CPI-W can decrease or remain flat. And when that happens, Social Security benefits follow suit.
Because of this, there have been three instances in the past when seniors on Social Security got a 0% COLA -- 2010, 2011, and 2016. And in 2017, benefits only rose 0.3%.
Furthermore, over the past 10 years, the average Social Security COLA has been 2.75%. This accounts for the 2016 and 2017 raises noted above. So, if 2025's COLA ends up being 2.63%, that's fairly in line with the average.
In fact, the average COLA over the past decade has been as high as 2.75% because we recently saw two giant raises following a prolonged period of inflation. In 2022, benefits rose 5.9%, followed by an 8.7% COLA in 2023.
The system for calculating COLAs could be improved
While the CPI-W has long been the basis of Social Security COLA calculations, there's a flaw in that system -- the index is not very representative of the costs retired workers face. And the very name of the index makes that obvious.
Urban wage earners and clerical workers are likely to have different spending habits than retirees. For example, people with day jobs need a way to get there unless they're working remotely. So, it's fair to say that urban and clerical workers generally spend more on gas and transportation than retirees on Social Security .
On the flip side, Social Security beneficiaries tend to have higher healthcare costs because they're older. Those costs are not heavily reflected in the CPI-W.
That's why some advocates have pushed to change the way Social Security COLAs are calculated. Rather than using the CPI-W, the CPI-E (Consumer Price Index for the Elderly) could result in more generous COLAs that allow Social Security recipients to maintain their buying power from year to year.
Unfortunately, this change won't be on the table for 2025. So, seniors may have to accept whatever Social Security COLA comes down the pike. However, if it's anywhere close to 2.63%, know that it's by no means the worst COLA in the program's history.
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