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Many Americans are uncertain about their ability to maintain a comfortable lifestyle in retirement. A 2023 survey by the Employee Benefit Research Institute (EBRI) revealed that confidence dropped more sharply last year than at any time since the 2008 Great Recession.
Craig Copeland, EBRI’s director of Wealth Benefits Research, pointed to “the current economic climate, particularly inflation,” as the main cause. Prices surged at their fastest rate in decades after the pandemic, and inflation remains high. As a result, 55% of retirees surveyed by EBRI in 2024 are concerned they may need to significantly reduce their spending.
Social Security benefits are meant to maintain purchasing power through cost-of-living adjustments (COLAs). In fact, benefits saw increases of 5.9% in 2022 and 8.7% in 2023, among the largest in the program’s history. However, this raises concerns about whether COLAs are truly keeping pace with inflation.
Research from The Senior Citizens League indicates that Social Security income has lost 20% of its purchasing power since 2010 because COLAs have consistently fallen short of inflation. If benefits had kept up, the average retired worker would receive an extra $370 per month in 2024, totaling $4,440 for the year.
This significant shortfall may explain why many Americans doubt their ability to fund retirement. Unfortunately, Social Security’s 2025 COLA might exacerbate the issue by once again underestimating inflation. Here are the key details.
Social Security benefits are on pace to get a below-average COLA in 2025
The Senior Citizens League estimates that Social Security benefits will see a 2.6% cost-of-living adjustment (COLA) in 2025. The chart below illustrates how a 2.6% COLA would affect the average payout for various beneficiary groups.
| Beneficiary Type | Average Benefit (Before COLA) | Average Benefit (After COLA) | Additional Monthly Income |
|---|---|---|---|
| Retired Workers |
$1,918 |
$1,968 |
$50 |
| Spouses |
$911 |
$935 |
$24 |
| Survivors |
$1,508 |
$1,547 |
$39 |
| Disabled Workers |
$1,538 |
$1,578 |
$40 |
table source: fool.com
The Social Security Administration won’t be able to determine the official 2025 COLA until third-quarter inflation data is available in early October. If the COLA ends up at 2.6%, it would be the smallest increase for beneficiaries since 2021 and fall short of the 10-year average of 2.75%. Additionally, there is another reason retirees grappling with inflation should be worried.
Read More: Here’s Why Over 70,000 People Lose Their Social Security Benefits Every Year
Some experts believe Social Security’s COLAs should be calculated differently
Social Security’s COLAs are calculated based on inflation changes during the third quarter, from July through September. The calculation involves comparing the third-quarter CPI-W (a subset of the Consumer Price Index) from the current year to that of the previous year. The percentage increase becomes the COLA for the following year.
The CPI-W tracks inflation according to the spending habits of hourly workers. Some policy experts argue this approach is problematic. Workers are generally younger than Social Security recipients and have different spending patterns. For example, retirees often spend more on housing and healthcare, while spending less on apparel, education, and transportation. Therefore, using the CPI-W to determine Social Security COLAs may not accurately reflect the inflation experienced by seniors.
Advocacy groups like The Senior Citizens League and the American Association of Retired Persons (AARP) argue that COLAs should be based on the CPI-E, a subset of the Consumer Price Index that reflects the spending patterns of individuals aged 62 and older. This index is thought to provide a more accurate measure of inflation for Social Security recipients.
Here’s the troubling news: the CPI-E has consistently surpassed the CPI-W every month this year. If the CPI-E is indeed a better indicator of inflation for seniors, the 2025 COLA is likely to fall short of reflecting the true inflationary pressures experienced by Social Security recipients.
| Month | CPI-E Inflation | CPI-W Inflation |
|---|---|---|
| January | 3.5% | 2.9% |
| February | 3.4% | 3.1% |
| March | 3.7% | 3.5% |
| April | 3.6% | 3.4% |
| May | 3.6% | 3.3% |
| June | 3.3% | 2.9% |
| Average | 3.5% | 3.2% |
table source: fool.com
As shown above, the average CPI-E for the first half of 2024 is three-tenths of a percentage point higher than the average CPI-W. This suggests that Social Security’s 2025 COLA is likely to be three-tenths of a percentage point too low. In other words, benefits are expected to lose more buying power next year.
While the official COLA will be determined in October, and the situation could change, retirees and other beneficiaries should brace themselves for another potentially inadequate COLA.
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