This could be a historic event for Social Security, but it may once again come at a disadvantage to the system’s retirees.
More than 51 million retired workers were receiving benefits in May. They received an average Social Security benefit of $1,916.63.That’s roughly $23,000 per year. America’s best retirement plan won’t make its recipients wealthy, but the income it generates helps provide a financial foundation for most seniors.
In April, the national polling company Gallup surveyed retirees to find out their Social Security Income Making ends meet: 88% of respondents said that Social Security benefits were their “major” or “minor” source of income. In fact, Gallup has conducted annual surveys for over 20 years that have found that 80% to 90% of retirees would struggle to cover living expenses without Social Security.
With roughly nine in 10 retirees relying on Social Security benefits in some form, it’s no surprise that cost-of-living adjustments (COLAs), released the second week of October, are the most eagerly awaited announcement each year.
Image source: Getty Images.
What is the purpose of Social Security COLA and how is it calculated?
As you know, the prices of the goods and services we buy regularly fluctuate. Prices can sometimes go up ( inflationThe role of Social Security’s COLA is to account for price fluctuations over time, either as prices rise (deflation) or fall (deflationary), across a wide range of goods and services, and to ensure that these fluctuations are reflected in the income recipients receive.
Put more simply, if the prices of a set of goods and services that seniors regularly purchase rise each year, Social Security benefits would ideally rise by the same percentage so that recipients don’t lose purchasing power.
Prior to 1975, there was no rhyme or reason for the cost of living adjustment. It was passed arbitrarily by special sessions of the Legislature, No adjustments were made throughout the 1940s.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Employees (CPI-W) has been the permanent inflation measure used by the Social Security Administration to calculate annual COLAs. The CPI-W has eight major expenditure categories and countless subcategories, each with its own weighting.
These separate weights allow the CPI-W to be broken down into a single number for each month, which can then be easily compared to the previous month or year to determine whether inflation or deflation has occurred.
Calculating your Social Security cost-of-living adjustment is pretty simple. Just take the average of the CPI-W over the last 12 months (Only figures from July through September are used to calculate the COLA.) is compared to the CPI-W average for the third quarter of the previous year. If the average goes up, inflation is occurring and recipients will receive larger benefits next year.
For those interested, the percentage difference in the average third quarter CPI-W from one year to the next is rounded up to the nearest tenth of a percentage point to determine the following year’s COLA.
Over the past three years, COLAs have increased due to above average inflation. US Inflation data Y Chart.
Social Security’s last cost-of-living adjustment was made in 1993.
At this time, we don’t have the CPI-W numbers that will count toward the 2025 COLA calculation, but the year-over-year CPI-W numbers through May 2024 will give us a big hint as to what’s to come. In particular, the CPI-W numbers suggest that Social Security’s COLA is progressing at a pace no one has seen since 1993.
In mid-June, the U.S. Bureau of Labor Statistics released its May inflation report, which showed that the CPI-W had risen 3.3% over the past 12 months, down 0.1% from 3.4% in the April inflation report. (Note: this article was written before the release of the June inflation report on July 11.)
Inflation eased slightly in May, but at least one estimate suggests Social Security’s cost-of-living adjustments could hit historic highs in 2025.
“The idea is to have a system in place that will allow people to live with their loved ones without having to worry about their health,” said Mary Johnson, an independent Social Security and Medicare policy analyst who worked for the nonpartisan senior citizens advocacy group Senior Citizens League before recently retiring. The COLA for 2025 is expected to be 3%..
Based on Social Security’s COLA performance over the past 20 years, a 3% cost-of-living adjustment is quite large: since 2010, there have been three years with no COLA (2010, 2011, 2016), and there have also been years with the smallest COLA on record (0.3% in 2017).
However, over the past three years, the cost-of-living adjustments for Social Security have been: The 20-year average is 2.6%Beneficiaries will see increases of 5.9%, 8.7% and 3.2%, respectively, in 2022, 2023 and 2024. Last year’s 8.7% increase was the largest since 1982 and the largest nominal dollar increase in Social Security benefits since the program began.
If Johnson’s 3% COLA estimate proves accurate, the situation will be “historic.” If so, it will mark the first time in 32 years that four consecutive years of COLA totals will be 3% or higher (from 1988 to 1993, COLAs ranged from 3% to 5.4%).
In dollar terms, a 3% cost-of-living adjustment would increase the average retired worker’s benefit by about $57 a month in 2025. Workers with disabilities Monthly payments to survivors would increase by an average of $46 and $45, respectively.
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Retirees remain at a disadvantage
On paper, you would think that four consecutive years of above-average COLAs would make things easier for retirees, but This is far from the truth.
Last May, when the Senior Citizens League released its 2024 COLA guidance, it also released a study comparing cumulative COLAs since the beginning of the 21st century to price changes for a variety of goods and services that seniors regularly purchase: While total COLAs from January 2000 through February 2023 have increased benefits by 78%, dozens of goods and services that retirees typically buy in bulk have increased in price by 141.4%.
The end result of the Senior Citizens League analysis is that Social Security income Purchasing power has fallen 36% since the start of the century..
The biggest problem is that the factors driving the current inflation rate are The most important expenditure for seniors isCompared to the average American worker, seniors spend a significantly higher percentage of their monthly budget on housing and health care.
Housing weighs more heavily in the CPI-W than any other category. As the Federal Reserve undergoes its most aggressive rate-hiking cycle in the last 40 years, mortgage rates are soaring and existing home sales are grinding to a halt. As expected, rental inflation remains high, which is driving up the CPI-W.
Recent months have also witnessed a resurgence in inflation in health services.
Even if Social Security’s 2025 cost-of-living adjustment were to be 3%, slightly higher than Johnson’s estimate, it still wouldn’t be enough of a “boost” to offset the inflation that retirees are currently facing. Retirees tend to be at a disadvantageAgain in 2025.
