Social Security's 2.5% cost-of-living adjustment (COLA) for 2025 was nothing to write home about. If you're receiving checks, there's a good chance you saw your expenses increase by more than this over the last year. And this isn't a one-off occurrence.
For years, seniors have been arguing that Social Security COLAs should be higher so that their checks stop losing buying power to inflation. There's even a solid proposal for how to increase COLAs in a way that better reflects senior spending. But there's a problem.
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Only Congress can change the Social Security COLA calculation. And so far, the idea hasn't gained much traction, possibly because of its unintended consequences.
Many want COLAs calculated using the CPI-E
Right now, the Social Security Administration calculates COLAs by looking at the annual changes in third-quarter inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It takes the numbers from July, August, and September for the current year and the last one, totals the figures from each year separately, divides each by three, and then looks at the percentage increase between the two averages. That amount becomes the COLA. For example, the 2024 average was 2.5% higher than the 2023 average, so the 2025 COLA was 2.5%.
It sounds logical until you realize that the CPI-W doesn't include retiree households in its data set. It actively excludes them, focusing instead on households with at least one worker who was employed for at least 37 weeks during the year and households where at least 50% of income came from wages. There's a separate index -- the Consumer Price Index for the Elderly (CPI-E) -- that tracks senior spending habits.
Comparing the two indices reveals key differences in the spending habits of the two groups. For example, seniors are more likely to experience health problems, so they spend more on healthcare than their younger counterparts do on average. Healthcare costs also tend to rise more quickly than other types of expenses. This can cause senior expenses to climb faster than the CPI-W would indicate.
One analysis from The Senior Citizens League (TSCL), a nonprofit senior group, found that if the Social Security Administration had used the CPI-E to calculate COLAs instead of the CPI-W, the average senior would have taken home about $2,689 more between 2014 and 2024. It would also have resulted in larger COLAs in eight of those years.
The problem with switching to CPI-E COLAs
Switching to the CPI-E seems like a straightforward solution. But its long-term consequences are likely a part of what's stopping Congress from making the change. Increasing COLAs would increase Social Security's expenses, and that's a problem.
Social Security has been spending more money than it takes in since 2021. So far, nothing's changed for beneficiaries because the program has made up the difference by taking money out of its trust funds. But that can't last forever.
The latest Social Security Trustees Report predicted Social Security's trust funds would be depleted in 2035. That came out before Congress passed the Social Security Fairness Act, which accelerated the trust funds' depletion by about six months.
Right now, if the government does nothing, Social Security would only be able to pay out about 77.7% of benefits going forward after its trust funds run out. That's probably not going to happen, though. It's more likely that Congress will find a way to increase funding for the program before the trust funds are depleted.
However, someone would get stuck with the bill. This could come in the form of a payroll tax increase, which is understandably unpopular with a lot of Americans who are struggling to pay their bills as it is. Given this situation, it's easy to see why politicians have been reluctant to make additional changes to Social Security that would cause it to run out of money even faster.
This doesn't mean a change to the CPI-E could never happen, though. However, it seems more likely that this would occur as part of a broader reform to Social Security rather than a one-off change.
