Social Security is a lifeline for millions of retirees in the United States, offering essential financial support in their later years. A significant aspect of this support comes from the cost-of-living adjustment (COLA), which helps retirees maintain their purchasing power amid rising prices.
While the upcoming COLA for 2025 is anticipated to be historic, many beneficiaries may still find themselves grappling with the challenge of making ends meet solely on Social Security income.
Importance of Social Security
In June 2023, over 51 million retired workers received an average monthly benefit of $1,918.28, equating to a little over $23,000 annually. This amount may seem modest, but it plays a critical role in the lives of many retirees. Social Security is more than just a paycheck; it’s a vital source of income that keeps millions above the poverty line. In 2022 alone, the program lifted 22.7 million people above the federal poverty line, including 16.5 million adults aged 65 and older.
Gallup surveys consistently reveal that 80% to 90% of retirees rely on their monthly Social Security payments to cover expenses. This dependency underscores the significance of COLA, as it directly impacts the financial well-being of beneficiaries. Despite the critical role of these adjustments, the reality is that many retirees may still struggle to cover their living expenses, even with a substantial COLA increase.
COLA and Its Calculation
The COLA is designed to adjust Social Security benefits in response to inflation, ensuring that recipients don’t lose purchasing power as the cost of goods and services rises. Before 1975, COLAs were not regularly scheduled; they were passed by Congress in special sessions, resulting in infrequent adjustments. However, since 1975, COLAs have been calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The CPI-W tracks the average change in prices over time for a fixed basket of goods and services. It includes various categories, each with its own weighting, which reflects the relative importance of each category in the spending habits of urban wage earners and clerical workers. The COLA is determined by comparing the average CPI-W readings from the third quarter (July through September) of the current year to those from the same period in the previous year.
If the current year’s third-quarter average CPI-W is higher than the previous year’s, a COLA is applied. This increase is expressed as a percentage, rounded to the nearest tenth, and reflects the rate of inflation. For instance, if the average CPI-W increases by 2%, Social Security benefits will increase by 2% in the following year.
Predictions for 2025
Over the past 15 years, COLA increases have often been modest. For instance, there were no COLAs in 2010, 2011, and 2016, while the 2017 increase was a mere 0.3%. In fact, 10 of the last 15 COLAs have been 2% or less. However, recent years have seen larger adjustments:
- 2022: 5.9%
- 2023: 8.7%
- 2024: 3.2%
The 8.7% increase in 2023 was particularly notable, marking the largest percentage increase in 41 years and the most substantial nominal-dollar boost in the program’s history. This trend of higher adjustments reflects the current economic conditions, including rising inflation rates.
As we approach 2025, there is significant anticipation surrounding the next COLA. Given the recent trends and the state of inflation, many are hopeful for another substantial increase. However, it’s important to remember that while a higher COLA can provide more financial relief, it may still fall short for many retirees who rely heavily on Social Security for their income.
Knowing how Social Security’s COLA works and its impact on beneficiaries is crucial for retirees who depend on these benefits. As we await the announcement of the 2025 COLA, it’s essential for beneficiaries to stay informed and plan accordingly. While COLA helps adjust for inflation, retirees should also consider additional sources of income to ensure financial stability in their golden years.
FAQs
What determines the Social Security COLA?
The COLA is determined by the CPI-W’s third-quarter average compared year-over-year.
How often are COLAs applied?
Annually, based on the CPI-W.
What was the COLA for 2023?
The COLA for 2023 was 8.7%.
How does the CPI-W affect Social Security benefits?
It measures inflation and adjusts benefits to maintain purchasing power.
Why is COLA important for retirees?
It helps maintain the purchasing power of Social Security benefits amidst rising costs.