Millions of Americans rely on Social Security payments as a crucial source of income. While retired workers constitute the largest beneficiary group, children, spouses, and disabled individuals also receive these essential benefits from the government.
Initially calculated based on a worker’s earnings record, Social Security payments would gradually lose their purchasing power without periodic adjustments. To address this, legislation enacted in 1973 introduced annual cost-of-living adjustments (COLAs), which began implementation in 1975.
COLAs, designed to counteract inflation, can vary significantly from year to year. Critics argue that these adjustments may not fully keep pace with rising senior expenses. For 2024, the Social Security COLA stands at 3.2%.
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COLA 2025 estimate
The Senior Citizens League has revised its projection for the 2025 COLA to 2.57%. This forecast is updated monthly based on the latest data from the consumer price index.
The COLA is determined using the consumer price index for urban wage earners and clerical workers (CPI-W). The Bureau of Labor Statistics calculates the CPI-W on a monthly basis. The figures from July through September are crucial as they ultimately determine the final COLA amount for each year.
In May, the CPI-W showed a year-over-year increase of 3.3%. Similarly, the consumer price index for all urban consumers also saw a 3.3% rise.
COLA 2024
In the year 2024, the Social Security Administration reported that the average monthly payment received by retirees from Social Security had increased by more than fifty dollars.
In 2024, the average monthly benefit for a single retired worker rose to $1,907, up from $1,848 in 2023. Similarly, for retired couples receiving benefits, the average monthly payment increased to $3,033 in 2024, compared to $2,939 in 2023.
What is a Social Security benefits COLA?
In most years, the Social Security COLA results in an increase in the monthly payment amount for beneficiaries. Similar to how workers may receive annual cost-of-living adjustments in their wages or salaries, Social Security recipients typically see their benefits raised each January.
“It’s not considered a bonus,” explained Judi Leahy, a senior wealth advisor at Citi Personal Wealth Management in Rye, New York, though some may perceive it as such.
Instead, the purpose of the COLA is to ensure that benefits can keep up with inflation. In rare instances when there is no inflation, Social Security payments remain unchanged in the following year.
How the Social Security benefits COLA is calculated
The Social Security Act mandates the use of the consumer price index to determine COLAs, with several variations of the CPI available.
Specifically, the Social Security COLA is linked to the CPI-W, which stands for the consumer price index for urban wage earners and clerical workers. This index is computed monthly by the federal Bureau of Labor Statistics. The COLA calculation relies on the CPI-W rate during the third quarter of the year, ending on September 30, to determine the COLA for the following year.
This means that the Social Security COLA for 2025 will be determined by comparing the third-quarter CPI-W figures from 2024 to those from 2023. If there is an increase in the CPI-W, Social Security benefits will be adjusted accordingly by that percentage. In cases where the CPI-W decreases or remains unchanged, benefits will not change in the subsequent year.
Is the Social Security COLA calculation fair?
The use of the CPI-W for calculating Social Security COLAs has sparked debate, with some advocating for alternative consumer price indexes.
“They have the right to switch those indices,” noted Chuck Czajka, founder of Macro Money Concepts in Stuart, Florida.
While the CPI-W tracks inflation affecting certain workers, it may not fully capture costs that disproportionately affect seniors.
“Health care expenses are likely the most significant indicators surpassing these inflation rates,” explained Megan Slatter, wealth advisor at Crewe Advisors in Salt Lake City.
To address these concerns, there has been a proposal for the Social Security Administration to adopt the CPI-E, an experimental index designed to better reflect the expenses of Americans aged 62 and older. However, switching to the CPI-E wouldn’t guarantee larger annual increases for Social Security beneficiaries.
For instance, in 2023, the CPI-E was lower than the CPI-W, resulting in an 8% increase in benefits instead of the 8.7% rise they received.
But in other years, the CPI-E would have provided higher COLAs. In 2024, for example, the CPI-E was 4%, exceeding the 3.2% COLA. According to calculations by The Senior Citizens League (TSCL), using the CPI-E would have led to larger COLAs in seven of the past ten years.
On the other hand, some argue that the CPI-W generates COLAs that are overly generous. The Cato Institute, a libertarian public policy organization, proposes replacing the CPI-W with the chained CPI, which adjusts for changes in consumer behavior by assuming that people choose cheaper alternatives as prices rise. Using the chained CPI would have resulted in a 0.32% lower average COLA for Social Security from 2013 to 2022.
“The so-called chained CPI would safeguard seniors’ purchasing power while enhancing Social Security’s sustainability,” stated the Cato Institute.
Currently, there are no immediate plans to modify how Social Security COLAs are calculated, and they are expected to continue being based on the CPI-W in the foreseeable future.
COLA benefits
COLA adjustments are applied to an individual’s primary insurance amount, which represents their Social Security benefits at full retirement age. Those opting for early benefits receive reduced payments, whereas delaying benefits results in higher payments.
Even recipients receiving the full 3.2% increase this year might find it insufficient to cover rising expenses. In such situations, exploring strategies to fill the financial gap becomes necessary.
“When planning for retirement, there are various options available to supplement income,” noted Leahy. Some retirees may reenter the workforce, while others might consider financial instruments like annuities offering guaranteed income.
When will the Social Security COLA increase take effect?
The 3.2% COLA took effect in January 2024.
While job salaries often include predictable annual cost-of-living adjustments, Social Security COLAs can fluctuate significantly.
“Because COLAs are linked to the CPI-W, they aren’t assured to rise annually,” noted Slatter.
As illustrated in the table below, Social Security beneficiaries have experienced periods exceeding a year without an increase in their benefit amounts.
History of COLAs
| YEAR | COLA | YEAR | COLA |
|---|---|---|---|
| 2024 | 3.20% | 2016 | 0.00% |
| 2023 | 8.70% | 2015 | 1.70% |
| 2022 | 5.90% | 2014 | 1.50% |
| 2021 | 1.30% | 2013 | 1.70% |
| 2020 | 1.60% | 2012 | 3.60% |
| 2019 | 2.80% | 2011 | 0.00% |
| 2018 | 2.00% | 2010 | 0.00% |
| 2017 | 0.30% | 2009 | 5.80% |