For quite a few folks across the country, Social Security is a vital program that they absolutely cannot live without. A recent analysis conducted by the Center on Budget and Policy Priorities discovered that this program actually helps to yank 22.7 million individuals above the established federal poverty line every single year. Surveys that have been completed by Gallup yearly for almost twenty years have revealed that close to 80 to 90 percent of retired people rely on their monthly Social Security payments in order to cover at least a portion of their monthly expenses.
Now, given how important the payouts for this program are for the 67 million people who draw it as a means of their income, the most important event of the year is without a doubt the cost-of-living adjustment, otherwise known as COLA, which is done in October by the Social Security Administration.
Via The Motley Fool:
In its simplest form, Social Security’s COLA is the mechanism used to tie benefits to inflation. If, for example, the price for a regularly purchased basket of goods and services by seniors increases from the previous year, Social Security benefits should, in an ideal world, rise by the same amount to ensure no loss of purchasing power. COLA is the tool that attempts to keep benefits on par with inflation.
Before 1975, COLAs were entirely arbitrary and determined by special sessions of Congress. Between 1940 and 1975, only 11 COLAs were passed along to beneficiaries, with none administered in the entirety of the 1940s.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the program’s annual inflationary tether. The CPI-W has more than a half-dozen major spending categoriesand a multitude of subcategories, all of which have their own respective weightings. These weightings allow the CPI-W to be chiseled down to a single figure, which allows for easy comparisons to the previous month or year to determine if the price for a broad spectrum of goods and services has risen (inflation) or declined (deflation).
An interesting tidbit about the COLA calculation is that it only takes readings from the third quarter, which consists of the months of July, August, and September. The other nine months can help with identifying price trends, they won’t actually factor into COLA.
If the average CPI-W reading form the third quarter (Q3) of the current year is higher than the average CPI-W reading from Q3 of the previous year, prices have risen and beneficiaries will see a beefier monthly check in the following year. The amount of the increase is simply the year-over-year percentage difference, rounded to the nearest tenth of a percent.
If prices end up falling from where they were the previous year — a rare occurrence, having only happened three other times since the mid-70s — benefits will remain the same for the upcoming year.
While we are currently pretty far out from July, which is when the CPI-W readings start to mean something significant, there are a number of groups who have issued statements concerning Social Security’s 2025 COLA.
“In February, the Congressional Budget Office (CBO) issued its annual Budget and Economic Outlook from 2024 through 2034 for Social Security’s Old-Age and Survivors Insurance Trust Fund, which covers benefit payments to retired-worker beneficiaries and the survivors of deceased workers. Among these projections was a call for Social Security’s COLA to reach 2.5% for 2025,” the Motley Fool went on to say in its article on the subject.
The article then explained, “To offer some context to the CBO’s projection, the roughly 50.5 million retired-worker beneficiaries who brought home monthly checks in February received an average of $1,910.79. A 2.5% cost-of-living adjustment added atop this figure would boost benefits for retired workers by almost $48 per month to $1,958.55.”
So based on that number above, $1910.79, a 1.8 percent COLA for 2025 would add about $34 a month, which increases the usual check to around $1,945.18 for next year.
According to the Motley Fool, the last three years have seen recipients of Social Security getting a pretty nice bump in their monthly payouts with COLAS of 5.9 percent, 8.7 percent, and 3.2 percent respectively, which came about in 2022, 2023, and 2024. But, alas, all good things must come to an end right? There’s some disappointing news ahead, so prepare yourselves.
If the CBO and TSCL are accurate in their estimates, and we’re talking anywhere in the ballpark, not exact, right on the money kind of accurate, folks will be frowning for sure.
The first disappointment would be the realization that payouts are set to climb by less than the average COLA over the past 20 years of 2.6%. After three years of meaningful benefit “raises,” retirees are likely looking at a return to what’s been the norm since the Great Recession — i.e., another subpar increase in their payouts.
That’s definitely not going to go over well, is it? This is why proper planning for retirement is so crucial. It’s a bad idea to rely on the government to take care of you, even if you’ve technically paid into the system for your entire life. Look how bad the government is at running the DMV. Did we really think they would do better managing our money for retirement?
The next bit of bad news is that the buying power of income from the Social Security program is going to really take a dive.
In May 2023, TSCL released a report that compared the average inflation that seniors have contended with since the start of the century to the aggregate COLAs they’ve received over the same period. Whereas COLAs have increased benefits by a total of 78% between January 2000 and February 2023, the cost of dozens of goods and services commonly purchased by seniors had risen by 141.4% over the same span. In other words, the purchasing power of a Social Security dollar had declined by 36% since 2000.
And, unfortunately, the likelihood that the decline in purchasing power will continue into next year thanks to high shelter inflation that refuses to go down. Workers who have retired from the work force usually spend a much higher portion of their monthly income to pay for a place to live and for their healthcare costs than the average American does. As long as that continues to be the case, a 1.8 percent or 2.5 percent COLA isn’t going to be enough to offset the inflation that retired individuals have to fight with.