Social Security is the cornerstone of many retirement plans. The program's monthly checks account for more than 50% of total household income for half of people age 65 or older, according to data analyzed by the Social Security Administration (SSA).
That makes the annual cost-of-living adjustment (COLA) built into Social Security an important factor for retirees to determine their budget for next year. The COLA is designed to help benefits keep up with inflation , a growing challenge for many seniors in recent years.
Earlier this month, the U.S. Bureau of Labor Statistics released the first data point that will go into determining the 2025 COLA. Retirees hoping for another big raise in their monthly check might see next year's benefit increase as a letdown.
Here's what we know so far and why next year's COLA could fall short for many retirees.
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Here's what the 2025 Social Security COLA could be
The annual cost-of-living adjustment is based on a measure of inflation called the CPI-W, which measures the increase in cost of a basket of goods commonly purchased by urban wage earners and clerical workers. The SSA will look at the average CPI-W reading throughout the third quarter of the year (July through September) and compare it to the prior year's third-quarter reading. The percentage increase determines the COLA for the following year.
The Bureau of Labor Statistics released the July reading for the CPI-W on Aug. 14. August's reading will come out on Sept. 11 and September's on Oct. 10. We won't know the official COLA until that final set of numbers comes out.
The July CPI-W reading came in roughly as expected at 308.501. For reference, the average third-quarter CPI-W reading in 2023 was 301.236. If prices stay flat for the next two months, seniors will receive a COLA of just 2.4%.
Of course, prices generally continue to climb, since a small amount of inflation is healthy for the economy. If they continue to climb around the same pace as last month, seniors will receive a 2.6% boost. If the CPI-W reading slows back down to the average of the previous three-month period, seniors will receive a 2.5% increase in benefits.
As such, seniors should currently expect a 2.5% to 2.6% COLA for 2025.
That's well short of the last few years of cost-of-living adjustments . Seniors received a 3.2% bump in their monthly checks this year after 8.7% and 5.9% increases in previous years. Those substantial increases in monthly benefits came amid soaring inflation. The return to more-normal inflation rates also means a return to more normal COLAs.
Still, many seniors might find the 2025 COLA falls short of their needs.
Seniors' expenses are climbing faster than their COLA
While Social Security uses the CPI-W as its go-to measure of inflation, the Bureau of Labor Statistics also publishes an alternative index called the CPI-E. That measures the increase in the price of goods and services reflecting the purchasing habits of Americans 62 and older -- i.e., those eligible for Social Security.
Last month, the CPI-E increased 3.2% year over year. That compares to just a 2.9% increase in the CPI-W reading. In other words, seniors are seeing their costs of living climb faster than their Social Security checks. That could lead to a significant budget shortfall for many next year.
The nonpartisan Senior Citizens League estimates the average Social Security benefit has lost 20% of its buying power since 2010. If the trend continues in 2025, seniors will continue to find their raises falling short of their needs.
A COLA between 2.5% and 2.6% isn't just a letdown after three years of substantial raises; it could be a letdown given the real costs of living seniors face today. We'll have to wait until Oct. 10 for the official numbers, but retirees should prepare now to find additional room in their budgets amid rising costs.
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