It seems like not too long ago, you could go to the grocery store with $100 and come home with a trunk’s worth of items. Nowadays, if you spend $100 at the grocery store, it seems like you’re back in a few days going through the whole process again. If you’re looking to point the finger at someone, inflation is your guy.
To offset inflation and help retirees keep their purchasing power (theoretically), Social Security uses the cost-of-living adjustment (COLA) to adjust monthly Social Security benefits in line with inflation (again, theoretically). Official COLA data won’t be released until October, but there are predictions available that can give retirees a jump-start on preparing for what it might be.
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How Social Security determines the annual COLA
The exact amount of the annual COLA is determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a monthly measure of inflation that includes typical household items (detergent, toilet paper, etc.), grocery store costs, and transportation (gas, public transportation, etc.).
Here are recent CPI-W data and the corresponding COLA:
| Year | Average Third Quarter CPI-W | COLA | Effective Date |
|---|---|---|---|
| 2023 | 301.236 | 3.2% | January 2024 |
| 2022 | 291.901 | 8.7% | January 2023 |
| 2021 | 268.421 | 5.9% | January 2022 |
| 2020 | 253.412 | 1.3% | January 2021 |
| 2019 | 250.200 | 1.6% | January 2020 |
Source: Social Security Administration.
Why retirees may be disappointed with next year’s COLA
The Senior Citizens League (TSCL) is a senior advocacy group focusing on issues affecting older Americans, such as Social Security. It’s also known for its COLA predictions, and in its latest estimates, TSCL noted that it expects the 2025 COLA to come in around 2.6%. This would be the lowest in three years and below the 3.9% average since 1975.
On the one hand, I’m sure retirees appreciate any increase in monthly benefits. On the other hand, after three years of generous COLAs (albeit because of high inflation), these projections are a bit underwhelming.
Is the CPI-W the best measure to determine the COLA?
Social Security has been using the CPI-W to determine COLAs since 1975. However, TSCL has suggested that maybe that measure isn’t the best choice, especially considering that retirees have lost 30% of their purchasing power since 2000 despite the COLAs.
To combat the inadequacies of Social Security COLAs, TSCL has recommended using the Consumer Price Index for the Elderly (CPI-E), an inflation measure more relevant to seniors (age 62 and older). It includes healthcare, housing, and other expenses typically more relevant to seniors than working-age people.
One problem with the CPI-W is that it doesn’t fully account for healthcare costs, one of seniors’ largest expenses. For perspective, PwC’s Health Research Institute estimates medical costs for the individual market to increase by 7.5% in 2025 — well above the projected COLA.
Legislation like the CPI-E Act and the Guaranteed 3% COLA Act aim to address these issues and, at minimum, set a floor for how much the COLA should be each year, regardless of inflation data. Whether these measures pass remains to be seen, but in the meantime, retirees should mentally prepare for a modest 2025 COLA.
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