If history is made on Social Security, it could once again come at the expense of the program’s retirees.
In May, more than 51 million retired workers received an average Social Security check of $1,916.63, which works out to about $23,000 a year. While America’s best retirement program won’t make recipients rich, the income it provides helps provide a financial base for most seniors.
In April, national pollster Gallup surveyed retirees to gauge how necessary their Social Security income is to get by. A whopping 88 percent of respondents said their Social Security benefits are either a “major” or “minor” source of income. In fact, more than two decades of annual Gallup surveys have shown that 80 percent to 90 percent of retirees would struggle to meet their expenses without Social Security.
About nine out of 10 retirees rely on their Social Security benefits in some way. It should come as no surprise then that the cost-of-living adjustment (COLA) announcement in the second week of October is the most eagerly anticipated announcement every year.
Image source: Getty Images.
What is the purpose of the Social Insurance Bank’s COLA and how is it calculated?
As you’ve probably noticed, the prices of the goods and services you buy on a regular basis fluctuate. They can rise (inflation) or fall (deflation) over time. Social Security’s COLA is charged with accounting for price changes across a broad range of goods and services and ensuring that these shifts are reflected in the income that beneficiaries receive.
Simply put, if the price of a package of goods and services that seniors regularly purchase increases from year to year, Social Security benefits should ideally increase by the same percentage to ensure that beneficiaries do not lose purchasing power.
Before 1975, there was no reason for cost-of-living adjustments. They were passed arbitrarily by special sessions of Congress, and no adjustments were made during the entire 1940s.
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the permanent inflation measure used by Social Security to calculate annual COLAs. The CPI-W has eight major expenditure categories and numerous subcategories, each with its own unique weightings.
These individual weightings allow the CPI-W to be broken down into a single figure each month. This figure can then be easily compared to previous months or years to determine whether inflation or deflation is occurring.
Calculating the Social Security cost-of-living adjustment is very simple. The average CPI-W value for the last 12 months of the third quarter of the current year (only values from July through September are used in the COLA calculation) is compared to the average CPI-W value for the third quarter of the previous year. If the average value increases, inflation has occurred and beneficiaries will receive a larger benefit in the coming year.
For those who want to know: the percentage difference in the average CPI-W value in the third quarter from one year to the next, rounded to the nearest tenth of a percent, determines the COLA for the coming year.
Above-average inflation has pushed COLAs higher over the past three years. U.S. inflation data from YCharts.
The last time Social Security adjusted the cost of living was in 1993.
While we don’t yet have any of the CPI-W values that will factor into the 2025 COLA calculation, the annualized CPI-W values through May 2024 offer big clues to what’s to come. The CPI-W values in particular suggest that Social Security’s COLA is on track to do something no one has seen since 1993.
In mid-June, the U.S. Bureau of Labor Statistics released its May inflation report, which showed that the CPI-W had risen by 3.3% on a trailing-12-month basis. This was down one-tenth of a percent from the 3.4% in the April inflation report. (Note: This article was written before the release of the June inflation report on July 11.)
While inflation eased slightly in May, at least one estimate suggests that Social Security’s cost-of-living adjustment could make history in 2025.
The COLA is on track to reach 3% by 2025, according to Mary Johnson, an independent policy analyst on Social Security and Medicare who worked for the independent seniors advocacy group The Senior Citizens League before her recent retirement.
Based on Social Security’s COLA track record over the past two decades, a 3% cost-of-living adjustment is a pretty big deal. Since 2010, there have been three years with no COLA (2010, 2011, and 2016), along with another year that saw the smallest COLA ever (0.3% in 2017).
But over the past three years, Social Security’s cost-of-living adjustments have been well above the 2.6% average of the past two decades. In 2022, 2023 and 2024, beneficiaries saw their checks increase by 5.9%, 8.7% and 3.2%, respectively. Last year’s 8.7% increase was the largest since 1982 and the largest nominal dollar increase in Social Security checks since the program’s inception.
Where it becomes “historic” is if Johnson’s 3% COLA estimate proves to be accurate. If so, it would be the first time in 32 years that four consecutive COLAs have totaled at least 3% (COLAs from 1988 through 1993 ranged from 3% to 5.4%).
In dollar terms, a 3% cost-of-living adjustment would increase the average benefit for retirees by about $57 per month in 2025. Meanwhile, monthly benefits for disabled workers and survivors would increase by an average of $46 and $45, respectively.
Image source: Getty Images.
Retirees continue to lose out
On paper, you would think that retirees would have achieved an above-average COLA for four years, but nothing could be further from the truth.
Last May, when The Senior Citizens League released its 2024 COLA guidelines, it also published a study that compared cumulative COLAs since the turn of the 21st century to price changes in a broad basket of goods and services that seniors commonly buy. While total COLAs increased benefits by 78% between January 2000 and February 2023, the dozens of goods and services that retirees typically buy collectively increased in price by 141.4%.
The end result of The Senior Citizens League’s analysis is that Social Security income has fallen by 36% of its purchasing power since the beginning of this century.
The biggest problem is that the factors responsible for maintaining the current inflation are the expenses that matter most to seniors. Compared to the average working American, seniors spend a significantly higher percentage of their monthly budget on housing and medical care.
Shelter has the largest weighting in the CPI-W of any category. With the Federal Reserve implementing its most aggressive rate hike cycle in four decades, mortgage rates have skyrocketed and existing home sales have stalled. Not surprisingly, rental inflation has remained stubbornly high, boosting the CPI-W.
In recent months we have also seen inflation in the medical sector increase again.
Even if the Social Security cost-of-living adjustment comes in at 3% in 2025, or slightly higher than Johnson’s estimate, it’s unlikely to be a large enough “increase” to offset the inflation retirees are currently experiencing. In short, retirees are likely to lose out again in 2025.