Social Security recipients get an annual cost-of-living adjustment (COLA) to protect the purchasing power of their benefits from inflation. Even so, many retired workers have struggled to keep up with rising prices. More than two-thirds of Social Security beneficiaries surveyed by The Senior Citizens League said the 3.2% COLA applied to payments this year failed to offset the increase in their household costs.
The latest data from the Labor Department shows that inflation cooled to a three-year low in August. That information was published this week and led to a downward revision in the COLA forecast for 2025. Read on to see why the latest forecast is good news and bad news for retired workers on Social Security.
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The good news: The downward revision in the COLA forecast means inflation is cooling quickly
The Senior Citizens League (TSCL) is one of the largest nonpartisan senior advocacy groups in the United States. Following August inflation data, TSCL revised its forecast for Social Security's 2025 cost-of-living adjustment (COLA) down to 2.5% (It had been 2.6%). Either way, retired workers and other beneficiaries are on track for the smallest COLA since 2021 .
A smaller COLA may not sound like good news, but it means inflation is cooling -- and that's a positive development. By design, COLAs reimburse Social Security recipients for the buying-power benefits that were lost in the previous year. As a result, beneficiaries are constantly behind the curve, but the financial strain is particularly bad when inflation is trending upward.
Think of it like this: Inflation reduces the value of money. If inflation trends higher each month, money depreciates at an accelerating pace. But if inflation trends lower each month, money depreciates at a decelerating pace. The burden is more bearable in the second scenario, so cooling inflation is good news for Social Security recipients, even though it means a smaller COLA in 2025.
The bad news: Social Security benefits may lose purchasing power in 2025
Social Security's annual COLAs are based on the CPI-W, a subset of the Consumer Price Index (CPI) that measures inflation based on the spending patterns of office workers and hourly wage earners. The CPI-W covers eight major spending categories that are weighted based on the typical behavior of the focus population.
Calculating COLAs using the CPI-W is a problem because workers tend to spend money differently than retired workers on Social Security. For instance, retirees generally spend more on housing and medical care and less on transportation and education. The CPI-W doesn't account for those differences, so it underemphasizes certain spending categories and overemphasizes others.
Many experts think Social Security's COLAs should be tied to the CPI-E, a subset of the Consumer Price Index that tracks inflation based on the spending patterns of individuals aged 62 and older. That population overlaps with retired workers to a greater degree, so it should be a more accurate gauge of inflation for those people.
Here's the bad news: CPI-E inflation is trending above CPI-W inflation through the first eight months of 2024. And the gap between the two metrics got wider in August because CPI-E inflation is cooling less quickly, as shown in the chart below.
Month | CPI-E Inflation | CPI-W Inflation |
|---|
January | 3.5% | 2.9% |
February | 3.4% | 3.1% |
March | 3.7% | 3.5% |
April | 3.6% | 3.4% |
May | 3.3% | 3.3% |
June | 3.3% | 2.9% |
July | 3.2% | 2.9% |
August | 2.9% | 2.4% |
Average | 3.4% | 3.1% |
Data source: Social Security Administration.
As shown above, CPI-E inflation averaged 3.4% through the first eight months of 2024. That is three-tenths of a percent above the average CPI-W reading.
If the CPI-E is truly a better inflation gauge for retirees, then Social Security's 2025 COLA will be three-tenths of a percent too small. In other words, Social Security benefits will lose buying power next year because the COLA will underestimate inflation from the perspective of retired workers.
That is especially concerning because The Senior Citizens League estimates Social Security already lost 20% of its purchasing power since 2010 because COLAs have consistently fallen short. Unfortunately, any changes to the way COLAs are calculated will probably have to wait until Congress resolves the impending insolvency of the Social Security trust fund , and that probably won't happen for several years.
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