As of January, more than 50 million retired workers were taking home an average monthly Social Security benefit of $1,909. Social Security checks don’t make retirees rich, but they help lift more than 15 million seniors age 65 and older out of poverty each year.
Additionally, the overwhelming majority of retirees rely on their monthly paycheck to survive. More than 20 years of annual surveys by the national polling firm Gallup found that 80% to 90% of retirees at the time needed some form of Social Security benefit to cover their expenses.
Given how important Social Security is to the economic foundations of aging Americans, it’s no wonder that no event is more anticipated each year than the Social Security Administration’s (SSA) disclosure of the Cost of Living Adjustment (COLA). do not have.
What is a Social Security COLA and how is it calculated?
Social Security cost-of-living adjustments are best thought of as a tool used by SSA to ensure that beneficiaries do not lose purchasing power due to inflation. This means that if the price of a commonly purchased basket of goods and services increases, in an ideal world, Social Security checks would also increase by the same percentage so that beneficiaries can continue to purchase the same goods and services. means it is necessary. COLA is a mechanism designed to make that happen.
Prior to 1975, Social Security COLAs were passed arbitrarily by special sessions of Congress. In fact, beneficiaries spent a full decade in his 1940s before his first COLA was passed in 1950. Since 1975, his COLA for this program has been calculated annually using the Consumer Price Index for Urban Wage and Office Workers (CPI-W).
The great thing about the CPI-W is that there are eight major spending categories and numerous subcategories, each with its own weighting. The benefit of giving everything a specific weight is that you can narrow down the CPI-W to a single number each month, allowing you to compare month-to-month and year-over-year movements in the price of an item. big Easily create a basket of products and services.
What’s unique about Social Security’s COLA calculation is that it only takes into account CPI-W measurements from the third quarter (Q3), or July through September. The remaining nine months of the year are reported by the U.S. Bureau of Labor Statistics (BLS) but are not considered in calculating COLA.
If the average CPI-W measurement for the third quarter of this year is higher than the average CPI-W measurement for the third quarter of the previous year, inflation is occurring and beneficiaries will receive higher payments next year. . The benefit increase is the year-over-year percentage difference in his CPI-W average measurement for the third quarter, rounded to the nearest tenth.
There may be a sign of hope in Social Security cost-of-living adjustments in 2025
As you can see, we’re still pretty far from the period that actually matters for Social Security COLA calculations. Nevertheless, the months that are not counted in the calculation can be a clue as to what beneficiaries can expect in the coming year.
The December inflation report released by the BLS in mid-January could offer a glimmer of hope to all of Social Security’s more than 67 million beneficiaries.
Although headline inflation has declined since June 2022, key components of both CPI-W and urban consumer price index (CPI-U) remain elevated. The CPI-U sheltered unadjusted 12-month inflation rate in December was a very high 6.2%. The CPI-U is an inflation measure similar to his CPI-W, and housing costs are the most weighted spending category in both indices.
Mortgage rates have soared after a period of historically low lending rates due to the Federal Reserve’s most aggressive rate hike cycle in more than 40 years. As a result, there are fewer used homes on the market, and landlords have more control over determining rental prices. As long as shelter prices continue to rise, I think there’s a good chance Social Security’s 2025 COLA will be higher than the 2.6% average over the past 20 years.
In fact, as of December 2023, the CPI-W has increased by 3.3% over the past 12 months. If Social Security’s 2025 cost-of-living adjustment were to settle at around 3% during the third quarter, the average retiree – worker benefits would increase by nearly $60 per month next year. .
There may be bad news
Cost of living adjustments from 2010 to 2021 were lackluster, with three years of no COLAs and four years of only 0.3% increase in benefit checks, the fourth consecutive year above average. His COLA in 2025 will be a welcome sight. Unfortunately, you are not immune to negative effects.
Historically high shelter inflation could put pressure on the program’s COLA in 2025, but shelter is one of two major expenditures (the other being health care) and the elderly account for a higher proportion of their monthly expenses than Americans of working age. In other words, if shelter-in-place inflation remains high, the purchasing power of retired workers is expected to decline, even if the COLA in 2025 is above the average of the past 20 years.
An unpleasant reality for the elderly is that the purchasing power of social security payments has plummeted since the beginning of this century.
In May 2023, the Nonpartisan Seniors Advocacy Group, Senior Citizens Alliance (TSCL), released a study examining this steady loss of purchasing power. Although the total cost of living adjustment from January 2000 to February 2023 increased by 78%, the cost of the typical basket of goods and services purchased by the average retiree increased over the same period. He increased by 141.4%. According to TSCL, the purchasing power of a senior’s Social Security income has decreased by 36% since 2000.
The culprit in this steady erosion is CPI-W. As the official name suggests, it is an index that focuses on the consumption trends of “salary earners and office workers in urban areas.” These are primarily working-age Americans, and few currently receive Social Security benefits.
Meanwhile, well over 80% of existing recipients are over 62 years old. Older adults spend money very differently than working-age Americans. As a result, the CPI-W does not adequately factor in the most important expenses for retired workers, such as shelter and medical care.
Lawmakers on both sides of the political spectrum agree that the CPI-W is not doing a particularly good job, but finding a solution is proving difficult. Both Democrats and Republicans have proposed workable solutions, but their inflation metrics are on opposite ends of the spectrum. With virtually no bipartisan cooperation in Congress on Social Security, there is little hope that this loss in purchasing power can be alleviated anytime soon.