As October approaches, anticipation builds among Social Security beneficiaries, particularly retirees, who are eagerly awaiting the official announcement of the 2025 cost-of-living adjustment (COLA). Unfortunately, it appears that the expected increase in Social Security checks may be a significant disappointment for many Americans. For most retirees, their Social Security check is more than just a piece of paper; it serves as a crucial source of income, and the majority of individuals over 62 would struggle to make ends meet without it.
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The Importance of Social Security for Retirees
For over two decades, the Gallup national survey has been gauging the extent to which older adults rely on the funds provided by America’s best retirement program. Regularly, between 80% and 90% of retirees indicate that their monthly income is essential for covering at least some of their living expenses. In Gallup’s 2024 study, only 11% of respondents reported that they do not rely on their Social Security payments.
Anticipated Announcement for October
The much-awaited announcement of the 2025 COLA is scheduled for October 10. This annual adjustment is of critical importance to 86% of beneficiaries aged 62 and older. While the 2025 Social Security COLA is expected to be a notable increase, seniors might face some unwelcome surprises. Ideally, the prices of goods and services would remain stable, easing concerns about whether wages or Social Security payments can keep up with rising costs associated with inflation.
How the Social Security COLA Is Calculated
In the real world, the prices of various products and services fluctuate. The Social Security COLA is designed to maintain the purchasing power of benefits over time. Before 1975, Congress assigned cost-of-living adjustments randomly during special sessions. However, since 1975, the annual COLA calculation has been tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index, published monthly by the U.S. Bureau of Labor Statistics, covers more than six major categories of spending, each with its own weighted percentage.
Origin of COLA
Before 1975, adjustments were assigned by Congress during special sessions. This often led to unpredictable increases that did not necessarily align with actual inflation rates.
Current Calculation Method
Since 1975, the COLA has been determined based on CPI-W data from the third quarter of each year. Comparisons are made between the current year’s third-quarter CPI-W and that of the previous year. If the average reading of the CPI-W for the third quarter of this year exceeds that of the previous year, it signals inflation, leading Social Security beneficiaries to anticipate an increase in their checks for the following year. However, the expected increase in 2025 checks might fall short of what millions of beneficiaries had hoped for.
Recent History of Social Security Payment Increases
Over the past 15 years, cost-of-living adjustments have been mostly minimal, with two-thirds of these adjustments being 2% or less. This period includes a record-low COLA of 0.3% in 2017 and three years with no COLA at all (2010, 2011, and 2016). Deflation, where prices continuously fall, results in no COLA. However, the last three years have seen notable increases in COLA for beneficiaries, with adjustments of 5.9%, 8.7%, and 3.2% in 2022, 2023, and 2024, respectively. Notably, the 8.7% COLA in 2023 marked the highest year-over-year percentage increase since 1982.
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Projections for the 2025 COLA
The Senior Citizens League (TSCL), a non-partisan organization advocating for senior concerns, estimates that the 2025 COLA will be 2.6%. This marks the first time in 28 years that four consecutive COLAs have reached a minimum of 2.6%, aligning perfectly with the 20-year average COLA of 2.6%. Mary Johnson, an independent expert on Social Security and Medicare policy, anticipates a slightly higher COLA of 2.7% for 2025. It has been 32 years since beneficiaries experienced a Social Security check increase of at least 2.7% for four consecutive years.
Preparing for Potential Disappointment
As the official announcement draws nearer, many retirees are preparing for a potential adjustment that may not meet their expectations, underscoring the ongoing importance of careful financial planning in retirement. While the COLA aims to keep up with inflation, it may not always suffice to cover the rising costs that many seniors face, making it crucial to explore other financial strategies to ensure a comfortable retirement.