There's been a lot of speculation about Social Security's upcoming cost-of-living adjustment (COLA). While we're getting closer to an official announcement for 2025, that information isn't available quite yet.
The Social Security Administration plans to put out a 2025 COLA announcement on Oct. 10. But based on what we know so far, it's looking like seniors may end up disappointed in the number that gets released. There's a reason for that, though, and it stems from a huge flaw in how Social Security COLAs are calculated.
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An imperfect formula, to say the least
Social Security COLAs are calculated based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of the year. When the CPI-W increases from one year to the next, Social Security benefits go up the following year. When the CPI-W decreases or remains flat, Social Security benefits stay the same.
Thankfully, Social Security recipients don't have to worry about their benefits decreasing due to falling inflation. They can only go up. But even when they do go up, those increases often don't allow seniors to maintain their buying power from one year to the next.
The problem is that while the CPI-W may be a useful economic tool in its own right, it's hardly the most appropriate one for measuring Social Security COLAs. And all we need to do is think about what the CPI-W measures to understand why.
The CPI-W focuses on the expenses that working-age Americans in urban areas tend to face. But Social Security recipients largely consist of retirees who aren't working. Also, many Social Security beneficiaries don't live in urban areas because they don't need proximity to jobs.
Because of these factors, the CPI-W does not adequately capture the costs Social Security beneficiaries tend to face. It also fails to emphasize senior-specific expenses like healthcare, which tend to eat up a large chunk of retirees' Social Security income.
That's why advocates have long been pushing for a better way to calculate Social Security COLAs -- using the CPI-E, or Consumer Price Index for the Elderly. An index centered on older Americans is more likely to lead to COLAs that do more good.
But while we could see a change to the way Social Security COLAs are calculated in the future, that's not going to happen in time for 2025. As a result, seniors may find that next year's COLA fails them to some degree.
Let's hope things change in the future
It may be too late to set up seniors on Social Security with a more generous and impactful COLA for 2025. But there's no need to assume that a change like this won't come down the pike eventually.
For now, seniors on Social Security should know that the working estimate for 2025's COLA is 2.5%. That number could rise or fall a bit by the time Oct. 10 rolls around, though.
Whether a COLA that size benefits seniors will depend on how inflation trends in the coming months. Either way, a serious change is needed in the way those raises are calculated. Until that happens, seniors should try to set themselves up to be less dependent on Social Security COLAs.
A good way to do that is to find ways to generate income, whether passively through investments or actively by joining the gig economy. Either step could take the pressure off of those COLAs and lead to less financial stress when they're overwhelmingly stingy.
