October brings lots of things. Columbus Day. Halloween. Major League Baseball playoffs. Breast cancer awareness month.
But for anyone who receives Social Security benefits, there’s another big event next month. The 2025 Social Security cost-of-living adjustment (COLA) will be announced in October. Here’s what that means for retirees.
What exactly is a COLA?
The Social Security COLA is an annual adjustment in benefits intended to help prevent the erosion of the buying power of those benefits due to inflation. Because of inflation, $100 in benefits received now might not be able to buy as much a year or more in the future.
Social Security hasn’t always given annual COLAs. Before 1975, any benefits increases for the federal program literally took an act of Congress. However, beginning in 1975, an automatic adjustment was made.
The amount of the annual COLA is calculated using an inflation metric called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W tracks the costs of a large basket of products and services incurred by primarily blue-collar workers in urban areas.
Social Security determines the annual COLA by comparing the average CPI-W for the third quarter of the current year against the average for the third quarter of the previous year. If the current-year average is higher, the percentage increase (rounded to the nearest tenth of 1%) will be the COLA for the next year.
It’s possible, though, that the average CPI-W for the third quarter doesn’t increase. If this is the case, there will be no COLA. This scenario has happened three times since 1975, most recently in 2015.
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How much will the 2025 Social Security COLA be?
The Social Security Administration (SSA) will announce the 2025 COLA on Oct. 10, 2024. That’s the day the Bureau of Labor Statistics releases its inflation data for September. The CPI-W for September is the only missing piece of information needed for SSA to calculate next year’s adjustment.
Since most of the numbers required to determine the COLA are already known, is it possible to make a pretty good guess of what the percentage increase will be? Yes, it is.
The Senior Citizens League, a nonprofit advocacy group for seniors, has already crunched the available numbers. It projects a benefits increase in 2025 of 2.5%. This prediction lines up with what independent Social Security and Medicare analyst Mary Johnson estimates next year’s COLA will be.
If this projection proves to be correct, retirees will receive the lowest annual benefit increase since 2021. However, 2.5% is only slightly below the average COLA of 2.6% over the last 20 years.
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Good news and bad news
Whatever the official amount of the 2025 COLA is, it will bring both good news and bad news to retirees.
The good news is that retirees’ Social Security benefits will be higher beginning in January. You’ll have more money to pay the bills. If the COLA is 2.5%, the average retiree would receive another $48 per month.
What’s the bad news? The COLA could be too little and too late.
The reason why the benefit increase could be too little is that the CPI-W used to calculate the COLA doesn’t reflect the expenses of retirees as well as it could. In particular, the metric doesn’t weight healthcare costs (which tend to be higher for older individuals) as heavily as some experts think is appropriate.
Legislation has been proposed in the past to replace the CPI-W with the Consumer Price Index for the Elderly (CPI-E), which is designed to more accurately reflect the costs incurred by older individuals. Until Congress changes the COLA calculation method, though, Social Security will continue to use the CPI-W.
As for why the COLA could be too late, retirees are already paying higher amounts for products and services this year. However, they won’t receive the increased benefits based on the 2024 inflation level until 2025. There’s always a delayed effect with the annual COLAs.
That might put a bit of damper on any celebration of the COLA announcement in a few days. But at least there’s still baseball and Halloween to enjoy in October.
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