Social Security benefits are expected to experience a below-average cost-of-living adjustment (COLA) in 2025
Many Americans are not confident that they will be able to live comfortably in retirement. In fact, a 2023 survey by the Employee Benefit Research Institute (EBRI) found that confidence fell more sharply last year than at any other time since the Great Recession in 2008.
Craig Copeland, director of wealth benefits research at EBRI, attributed the problem to “the current economic climate, particularly inflation.” In fact, prices across the economy rose at their fastest pace in decades following the pandemic, and inflation remains high today. As a result, 55% of retirees surveyed by EBRI in 2024 fear they will have to make significant spending cuts.
Of course, Social Security’s purchasing power is theoretically protected by cost-of-living adjustments (COLAs). In fact, benefits received COLAs of 5.9% in 2022 and 8.7% in 2023, two of the largest increases in the program’s history. But that raises the question of whether COLAs really keep pace with inflation.
Research from the Senior Citizens League suggests that Social Security benefits have lost 20% of their purchasing power since 2010 because COLAs have consistently underestimated inflation. If payouts had kept pace with inflation, the average retiree would receive an additional $370 in monthly benefits in 2024, or $4,440 for the full year.
This sizable deficit may explain why so many Americans don’t believe they can fund their retirement. Unfortunately, Social Security’s COLA for 2025 could make the problem worse by once again underestimating inflation. Here are the important details.
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Social Security benefits are expected to receive a below-average COLA in 2025
The Senior Citizens League projects that Social Security benefits will see a cost-of-living adjustment (COLA) of 2.6% in 2025. The chart below shows how a 2.6% COLA would affect the average payout for different groups of beneficiaries.
|
Beneficiary type |
Average benefit (before COLA) |
Average benefit (according to COLA) |
Additional monthly income |
|---|---|---|---|
|
Retired employees |
$1,918 |
$1,968 |
50$ |
|
Spouse |
911 US dollars |
$935 |
$24 |
|
Survivors |
$1,508 |
1,547 USD |
$39 |
|
Disabled workers |
$1,538 |
$1,578 |
$40 |
Data source: Social Security Administration. Note: Benefit amounts are rounded to the nearest dollar.
The Social Security Administration can’t calculate the official COLA for 2025 until it releases third-quarter inflation data in early October. But if the COLA does indeed come in at 2.6%, it would be the smallest increase for beneficiaries since 2021. It would also be below the 10-year average of 2.75%. But there’s another reason why retirees struggling with inflation should be concerned.
Some experts believe Social Security COLAs should be calculated differently
Social Security COLAs are based on inflation trends in the third quarter, the three-month period from July to September. Inflation is measured using a subset of the consumer price index called the CPI-W. Specifically, the CPI-W of the current year’s third quarter is divided by the CPI-W of the previous year’s third quarter, and the percentage increase becomes the COLA in the following year.
The CPI-W measures inflation based on the spending patterns of hourly wage earners. Some policy experts see this as a problem. Workers tend to be younger than welfare recipients, and young people spend their money differently than seniors. For example, retirees tend to spend more on housing and health care and less on clothing, education, and transportation. In this context, it makes no sense to determine Social Security COLAs based on changes in the CPI-W.
In fact, advocacy groups such as the Senior Citizens League and the American Association of Retired Persons (AARP) believe that COLAs should be tied to another subset of the Consumer Price Index, called the CPI-E. The CPI-E measures inflation based on the spending habits of people ages 62 and older, which theoretically makes it a better indicator of price pressures on welfare recipients.
This brings me to the bad news. The CPI-E has outperformed the CPI-W in every month this year. In other words, if the CPI-E is truly a better indicator of inflation for welfare recipients, then the 2025 COLA is on track to underestimate inflation.
|
Month |
Consumer Price Index (CPI) – 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 |
3.6% |
3.3% |
|
June |
3.3% |
2.9% |
|
Average |
3.5% |
3.2% |
Data source: US Bureau of Labor Statistics.
As shown above, the average CPI-E is three-tenths of a percentage point higher than the average CPI-W through the first half of 2024. This means that Social Security’s COLA for 2025 is expected to be three-tenths of a percentage point too low. In other words, benefits will likely lose even more purchasing power next year.
Of course, the official COLA cannot be calculated until October, so the situation could change. However, retirees and other benefit recipients should prepare for another underestimated COLA.
