In 2022, the US was hit by the worst inflation in four decades, amid the ongoing macroeconomic disruptions and supply chain challenges that followed the COVID-19 pandemic. As a result, Social Security beneficiaries received a cost-of-living adjustment (COLA) of 8.7% in January 2023 – the largest increase since the early 1980s. But many retirees are still struggling.
According to the 2024 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, more than a quarter of retirees are not confident in their ability to live comfortably in retirement. Inflation was the most common reason for that lack of confidence. In addition, more than half of retirees who responded said they were concerned they would have to make significant cuts to offset rising prices.
It is therefore logical that many retirees would like to know how much their benefits will increase next year. We are still many months away from officially learning what the 2025 COLA will be, but the Senior Citizens League recently updated its prediction again.
Social Security COLAs are determined by inflation
Social Security’s annual COLAs are based on the rate of inflation in the third quarter of each year – July through September. The specific measure used is a subset of the Consumer Price Index (CPI), known as the Consumer Price Index for Urban Wage Earners and White-collar Workers (CPI-W), which tracks a price basket designed to reflect what these workers spend their money on . .
However much the CPI-W increases year over year during the quarter (if that is the case), that is what the following year’s COLA will be. For example, the 3.2% COLA applied to Social Security benefits in 2024 reflects a 3.2% increase in the third quarter 2023 CPI-W.
The Social Security Administration cannot calculate the 2025 COLA until the Department of Labor releases September CPI-W data in October. That means any estimates made before any real data comes in are subject to change, although predictions will become increasingly accurate as October approaches.
The good news: Social Security benefits could get a bigger COLA than previously expected
CPI-W inflation accelerated successively in February and March, then slowed in April. As a result of that back and forth, the Senior Citizens League has already revised its forecast for the 2025 COLA several times. And with each subsequent revision, the prediction has increased.
In January, the nonprofit and nonpartisan advocacy group predicted that Social Security benefits would rise 1.4% next year. But the country raised its 2025 COLA forecast to 1.8% in February, 2.4% in March, 2.6% in April and 2.7% in May, as the decline in inflation stalled in the close to 3% to 3.5%.
If the group’s latest estimate is correct, the average retired worker’s monthly benefit will increase from $1,915 in April 2024 to $1,967 in January 2025. In other words, a 2.7% COLA means the average retiree would earn $51 per month receive additional (or $612 for the full year) in Social Security benefits in 2025.
The bad news: Social Security benefits may lose some purchasing power in 2025
As mentioned, the Social Security COLA for a given year depends on how the CPI-W changed in the third quarter the previous year. COLAs are intended to compensate for the loss of purchasing power due to inflation in the previous year.
With that in mind, the average CPI-W through the first four months of 2024 was 3.2% higher than the average CPI-W through the first four months of 2023. In that context, a 2.7% COLA in 2025 is potential bad news for beneficiaries because the CPI-W has risen more steeply than that.
If this trend continues – that is, if the full-year CPI-W rises more than the third-quarter CPI-W in 2024 – social security benefits will lose some purchasing power in 2025. So retired workers and other beneficiaries may feel like they will have less money next year, despite the increase in the cost of living.
As a small consolation, interest rates are at a 20-year high, so moving cash into a high-yield savings account would be a good way to make some extra money right now.
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The 2025 Social Security COLA forecast has just been updated. Here’s the Good News and the Bad News for Retirees was originally published by The Motley Fool
