Two months. That's roughly how long retirees must wait for important news that impacts them financially.
I'm referring, of course, to the mid-October announcement of the 2025 Social Security cost-of-living adjustment (COLA) . Currently, Social Security benefits are projected to increase by 2.6% to 2.7%. However, I predict the actual 2025 Social Security COLA will be higher than current projections. Here's why.
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How the Social Security COLA is calculated
Before we get to the rationale behind my prediction, it's important to understand how the Social Security COLA is calculated. The underlying purpose of COLAs is to help prevent Social Security benefits from being eroded by inflation . Unsurprisingly, inflation numbers are at the heart of the Social Security COLA calculation.
Which inflation numbers does the Social Security Administration (SSA) use to compute the annual COLA percentage? It's not the ones you hear about the most. The so-called "headline" inflation number is the Consumer Price Index (CPI), or to be more accurate, the Consumer Price Index for All Urban Consumers (CPI-U).
However, to calculate the annual COLA, SSA uses a different metric: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W focuses only on prices incurred by individuals in urban areas with more than half of the family's income earned from clerical or hourly wage jobs.
Importantly, SSA calculates the percentage increase (if any) between the average CPI-W in the third quarter of the current year and the average CPI-W in the third quarter of the previous year. It then rounds that number to the nearest tenth of a percentage. If there isn't an increase, Social Security beneficiaries don't receive a COLA.
Why predict a higher COLA?
There's a simple reason I think the actual 2025 Social Security COLA will be higher than current estimates. I suspect inflation will increase in Q3 enough to bump the COLA above the projected 2.6% to 2.7% range.
It's a near certainty that the average CPI-W in Q3 will be higher than the average from Q2. The CPI-W average has risen every year in Q3 versus Q2 since 1974. The average has risen year over year in all but three years during the period.
The year-over-year inflation rate has been generally trending downward since June 2022. I expect it to move higher in Q3, though, because oil prices are likely to rise, in my view. When oil prices increase, so do the costs of many products.
Sure, oil prices have fallen recently due to increased fears about a potential recession after a disappointing July jobs report. However, I think those worries are overblown. Unemployment didn't increase because of layoffs. Instead, more people re-entered the labor market.
Meanwhile, Chinese imports of crude oil and natural gas increased in July. This is a good sign that demand remains strong (which means prices aren't likely to fall).
Tension in the Middle East has also risen, with Iran now threatening to respond to the assassination of Hamas leader Ismail Haniveh in Tehran. If Iran attacks Israel, look for oil prices to surge higher.
Higher doesn't mean much higher
While I think the 2025 Social Security COLA will be higher than current estimates, I don't expect it to be much higher. My guess is that retirees could be looking at a Social Security benefits increase close to 2.8% or 2.9% instead of 2.6%.
My prediction could be wrong, though. A lot can change in a short time.
We'll have to wait until October to find out what the Social Security COLA will be. One thing is certain regardless of the actual amount: Retirees will incur the pain of inflation well before they get any relief from a benefits increase.
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