Social Security recipients get an annual cost-of-living adjustment (COLA) to protect the buying power of benefits from inflation. But The Senior Citizens League (TSCL), one of the largest nonprofit senior advocacy groups in the U.S., estimates the purchasing power of benefits has declined 20% since 2010. "COLAs have become less and less likely to keep up with inflation over time," TSCL wrote in a recent press release.
That's surprising because Social Security recipients have received relatively large COLAs in recent years: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. Prior to that, COLAs had not exceeded 3% since 2012. But over two-thirds of Social Security recipients surveyed by TSCL said the latest COLA failed to cover the increase in their household expenses.
Consequently, many retired workers are dealing with financial hardship. Less than 50% think they have enough money to live comfortably through retirement, and nearly 90% are worried about inflation reducing the value of their savings, according to the 2024 U.S. Retirement Survey from investment manager Schroders.
Against that backdrop, Social Security recipients may be surprised to learn that TSCL recently revised its 2025 COLA forecast down to 2.5%, which represents the smallest raise since 2021. Here are the important details.
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Social Security recipients will likely receive the smallest COLA since 2021
Since 1975, Social Security benefits have been adjusted annually based on how inflation changes in the third quarter of each year, meaning the three-month period between July and September. Specifically, cost-of living adjustments (COLAs) are tied to a subset of the Consumer Price Index known as the CPI-W.
The math is straightforward: The third-quarter CPI-W from the current year is divided by the third-quarter CPI-W from the prior year, and the percent increase becomes the COLA in the following year. That means the Social Security Administration cannot calculate the official 2025 COLA until September CPI-W data is available, which won't happen until October 10, 2024.
However, CPI-W inflation has trended downward from 2.9% in January to 2.4% in August, so The Senior Citizens League (TSCL) estimates benefits will increase 2.5% in 2025. The last time Social Security benefits got a sub-3% COLA was 2021. That may worry retired workers, especially those in financial distress, but a smaller COLA in itself is not the real problem.
Social Security benefits will likely lose more buying power in 2025
The real problem with a smaller COLA in 2025 is the way it's being calculated. The CPI-W measures inflation based on spending patterns of office workers and hourly wage earners. People in those categories are usually younger than Social Security recipients, and young people tend to spend money differently.
Most importantly, retirees on Social Security tend to spend more on housing and medical care. So, from their perspective, the CPI-W underrepresents the importance of those spending categories. That is problematic because the CPI-W increased 2.4% in August, but costs associated with housing and medical care increased 4.3% and 3.3%, respectively.
So, what we have is above-average inflation in underrepresented spending categories. That means the CPI-W is underestimating the impact of inflation on retired workers. We can strengthen our case by checking the CPI-E, a subset of the Consumer Price Index that measures inflation based on spending patterns of people aged 62 and older, a group that aligns more closely with the average Social Security beneficiary.
The CPI-E increased 2.9% in August. That puts it a half percentage point above the CPI-W, which increased 2.4%. That supports the idea of the CPI-W being an imprecise gauge of inflation for retired workers. And if the current trend persists, the 2025 COLA will arguably be one-half of a percentage point too small, which means Social Security benefits will lose buying power next year.
Unfortunately, Social Security recipients have few options for recourse beyond prudent budgeting and part-time work. However, two sources of additional income worth consideration are high-yield savings accounts and certificates of deposit (CDs). Interest rates are at their highest level in decades, so retirees that stash money away today should find themselves with a little extra cash in the future.
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