Now that third quarter inflation figures are complete, it’s time for Social Security officials to calculate the annual COLA – the cost-of-living-adjustment. This year, as predicted, the gain that beneficiaries will see on their monthly benefits beginning in January is modest, calculated at an announced 2.5 percent.
This annual announcement always generates plenty of press coverage, since the Social Security COLA affects so many millions of people. For many, we predict the news of a fairly small increase will come as a disappointment, although not necessarily an unexpected one. Prices may be coming down on some of the goods and services consumed by seniors, but living costs in many categories remain stubbornly high, with low-to-moderate income retirees caught in the pinch. A modest COLA may not do much to help seniors keep up.
For a closer look, we’re featuring this article on Social Security COLA from the Washington Post, as explained by reporter Julie Zauzmer Weil. Let’s see what you can expect come January.
Cooling Inflation Triggers a Smaller COLA for 2025
Weil begins with the basics. “Social Security recipients will see a 2.5 percent increasein their monthly checks next year, the federal government announced Thursday [October 10th],” she writes. “It’s a smaller hike than in recent years, which was expected given the cooling of inflation.”
Her article explains that many beneficiaries might have grown used to much larger adjustments during years of rising costs for just about everything. “Soaring prices in recent years brought unusually large cost-of-living increases in benefit checks,” Weil says, “since Social Security payouts are automatically adjusted once a year based on a government measure of inflation.”
How large? Just three years ago, the 2022 COLA brought seniors a 5.9 percent boost. This was topped by an 8.7 percent increase in 2023, which was the largest bump in about 40 years. Last year the inflation rate decreased, and so did the COLA, down to 3.2 percent for 2024.
What This Will Mean to Social Security Recipients Next Year
All retirees and people with disabilities who receive Social Security payments will see the 2.5 percent boost beginning at the start of 2025.
“For the average retiree who now receives $1,907 monthly, that represents a monthly raise of about $48,” says the Washington Post. “Beneficiaries who receive the maximum monthly benefit, which is $4,873 this year, will see about $122 more per month next year.”
If you’re among the 67 million Social Security beneficiaries nationwide, watch for a personalized letter in December telling you how much your own benefits will increase.
Annual COLA is a Major Advantage of Social Security
According to AARP, regular annual cost-of-living adjustments didn’t become part of Social Security until 1975. Prior to that, it took an act of Congress to boost rates to match inflation.
We checked AARP’s table showing COLA rates back to 1975, and the average has been around 3.7 percent. The highest COLA figures were in 1980 (14.3 percent) and 1981 (11.2 percent). At the other end of the spectrum, there have been three years (2010, 2011, and 2016) when beneficiaries received no COLA at all. (Benefits are never reduced even if cost-of-living declines.)
“A low cost-of-living adjustment means that seniors’ purchasing power wasn’t eroded as much as in previous years,” Romina Boccia of the libertarian Cato Institute told the Washington Post. “People shouldn’t think of this as a bonus on top of their benefit, but rather as a necessary adjustment to make sure that their benefit is able to buy as many goods and services as previously.”
Annual COLA Calculation Triggers Controversy
Weil writes, “The increase is based on the average inflation during the third quarter — July, August and September — as measured by the consumer price index for Urban Wage Earners and Clerical Workers (CPI-W). It’s intended to reflect cost-of-living changes over a one-year period.” The hike in benefits is designed to allow seniors to continue covering their living expenses even as prices rise.
Disagreement over the cost-of-living standard lies at the root of the COLA controversy. Many advocates for seniors argue that the CPI-W doesn’t accurately represent the spending habits of most retirees. Instead, these advocates have lobbied for the adoption of what’s called the CPI-E, or the Consumer Price Index for the Elderly, first developed by the Bureau of Labor Statistics in 1987. The CPI-E, they say, more closely matches senior spending patterns.
The biggest single difference between the CPI-W and the CPI-E is in the area of health care spending. “Research has shown that spending patterns differ between the elderly and the general population, especially in the health care category,” says the National Committee to Preserve Social Security and Medicare (NCPSSM). “Seniors 65 and older spend more than twice as much on health care, and those 75 and older spend nearly three times more on health care than younger consumers.”
The NCPSSM adds that health care costs consistently rise much faster than other market basket categories, but that “the current price index (CPI-W) does not take these critical differences in the elderly population into consideration.”
Social Security Benefits May Not Keep Up with Expenses for Many
As reported by the Washington Post, this difference between CPI indices is hardly a minor dispute. Even with the increases in their Social Security checks, many seniors are facing hikes in medical costs and other expenses such as senior housing which threaten to leave them falling farther behind.
Still, advocates caution against giving the political party in power too much blame for small COLA gains, or too much credit for big ones. “So many beneficiaries really don’t understand that it’s automatic and it’s mechanical. It’s not political. Nobody plays around with the numbers,” said Nancy Altman of the advocacy organization Social Security Works. “When it’s high, they tend to give credit to whatever administration is there.”
Before Thursday’s announcement, Weil writes, Altman predicted frustration among beneficiaries who have high bills and want more money in next year’s checks. “When seniors get next year’s modestly larger checks, she said, ‘I think they’re going to be disappointed.’”
(For those at the other end of the wage spectrum, the Washington Post article also notes a hike in the amount of income subject to Social Security taxes for 2025. That figure will rise from the current threshold of $168,000 in income to $176,000 next year.)
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(originally reported at www.washingtonpost.com)