In April, nearly 51 million retired worker beneficiaries took home an average Social Security check of $1,915.26. While not a groundbreaking amount of monthly money, Social Security benefits have proven critical to the financial well-being of most retirees.
In addition to lifting about 16.5 million seniors age 65 and older out of poverty in 2022, Social Security benefits represented a “major” or “minor” source of income for 88% of retirees surveyed last April by national pollster Gallup questioned. Considering how important Social Security income is to retirees’ financial foundations, all eyes are on the 2025 Cost of Living Adjustment (COLA).
Why is the Social Security Cost of Living Adjustment so important?
Simply put, Social Security’s COLA is the tool used by the Social Security Administration (SSA) to account for changes in the price of goods and services. For example, if the price for a wide range of goods and services that seniors regularly purchase increases from year to year, in a perfect world Social Security benefits would have to increase by a proportionate amount to ensure no loss of purchasing power. Keeping benefits in line with inflation is what Social Security’s COLA is all about.
Before 1975, cost-of-living adjustments were completely arbitrary and passed through special sessions of Congress. Only eleven benefit increases were implemented between 1940 and 1975, and none were implemented during the entire 1940s.
In 1975, things changed. For approximately the past half century, the Consumer Price Index for Urban Wage Earners and White-collar Workers (CPI-W) has served as the program’s annual inflation measure. The CPI-W has more than six major spending categories and a plethora of subcategories, all of which have their own respective weightings. These weights allow the CPI-W to be reported as a single figure each month, making it easy to make comparisons with previous months or the previous year to determine whether inflation (rising prices) or deflation (falling prices) has occurred.
Social Security’s COLA calculation is unique because only the CPI-W values ​​from the third quarter (July through September) are included in the calculation. While the final values ​​for the remaining nine months can help determine identity price trends, they will not be used by the SSA to calculate Social Security’s COLA for the coming year.
Simply put, if the average CPI-W value of the third quarter of the current year is higher than the average CPI-W value during the comparable period of the previous year, inflation has occurred and beneficiaries are due a larger payout . The year-over-year percentage change in third-quarter average CPI-W values, rounded to the nearest tenth of a percent, determines how much Social Security checks will increase in the coming year.
Here’s how much Social Security checks are expected to rise in 2025
Over the past three years, Social Security beneficiaries have seen a significant boost in their monthly checks, with cost-of-living adjustments of 5.9% (2022), 8.7% (2023) and 3.2% (2024) . For context, the average COLA over the past twenty years was 2.6%. Beneficiaries are hopeful that an above-average increase is in store for 2025.
On May 15, the U.S. Bureau of Labor Statistics released its long-awaited April inflation report, which offered clues about the direction in which collective prices are moving. The CPI-W has risen 3.4% over the past twelve months, which remains well above the Federal Reserve’s long-term target of 2% inflation.
Thanks to persistently high core inflation, which ignores food and energy costs, nonpartisan senior advocacy group The Senior Citizens League (TSCL) has once again raised its long-term forecast for Social Security’s 2025 COLA. While we still haven’t reached the months that actually matter in the COLA calculation, TSCL believes the COLA for 2025 will be 2.66%, which equates to 2.7%. If true, this would be (barely) the fourth year in a row of above-average COLAs for beneficiaries.
But it’s one thing to see a percentage forecast on paper, and quite another to see how that percentage could tangibly affect Social Security checks. With the understanding that COLA’s forecasts are still fluid, let’s take a closer look at exactly how much a 2.7% cost-of-living adjustment would increase Social Security checks in 2025.
For retired workers, who I previously noted took home an average check of $1,915.26 in April, a 2.7% COLA would translate to a monthly increase of $52 next year. In short, the average retired worker beneficiary would take home about $1,967 each month, if this prediction proves accurate.
Employees with disabilities and survivors would also see a meaningful increase in their monthly payouts. The approximately 7.25 million workers with disabilities who received benefits in April would see their monthly payouts increase by an average of $42 to $1,579. Meanwhile, the 5.8 million surviving beneficiaries can expect their monthly checks to increase by $41, to an average of $1,544.
Keep the champagne on ice
While most signs point to Social Security recipients enjoying above-average cost-of-living adjustments for the fourth year in a row, the 2025 COLA is unlikely to be a cause for celebration. While higher inflation appears to increase benefits, the costs that matter most to seniors are rising even faster.
For example, seniors spend a higher percentage of their monthly expenses on housing and medical care than the average working-age American. Higher mortgage rates have brought the housing market to a virtual standstill and kept housing inflation stubbornly high (5.5% over the past 12 months, based on the Consumer Price Index for All Urban Consumers, or CPI-U). . A slightly above-average COLA won’t make a dent if shelter inflation remains well above historical norms.
Similarly, medical inflation has picked up again over the past six months and is currently up 2.7% over the past twelve months.
The pace at which shelter and medical care services are increasing suggests that seniors, who make up roughly 86% of Social Security beneficiaries, will see the pricing power of their Social Security dollars decline by 2025. According to a May 2023 study by TSCL, the purchasing power of a Social Security dollar fell 36% between January 2000 and February 2023.
Unfortunately, for the majority of program beneficiaries, there is no easy solution to this persistent loss of purchasing power. The CPI-W is inherently flawed and focuses on the spending habits of working-age Americans, who in many cases do not receive Social Security checks and spend their money very differently than seniors. Without change on Capitol Hill, Social Security beneficiaries appear destined for disappointment with 2025 COLA on deck.
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Here’s Exactly How Much Social Security Checks Are Expected to Rise in 2025 Originally published by The Motley Fool
