In the upcoming weeks, Social Security recipients will receive their initial payments reflecting the 2025 cost-of-living adjustment (COLA), bumping the average monthly benefit up to $1,976. This increase, while helpful, falls short of expectations set by the significant COLAs of recent years, including the 8.7% hike in 2023.
There is concern that this year’s 2.5% increase will not adequately meet the growing expenses faced by seniors in 2025. A peculiar aspect of how Social Security benefits are calculated is partly to blame, potentially costing the average retiree about $120 more next year, with some losing out even more.
Calculating Cost-of-Living Adjustments
The Social Security Administration (SSA) generally adjusts benefits annually to align with inflation, using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) measured during the third quarter. The process involves averaging the CPI-W data from July, August, and September of the current year, then comparing it with the averages from the same months the previous year to determine the COLA. For 2025, this formula resulted in a 2.5% increase based on the 2024 data.
However, the CPI-W predominantly reflects the spending patterns of employed urban dwellers, ignoring the different expenditure trends of retirees. Instead, the spending habits of those aged 62 and over are tracked by the Consumer Price Index for the Elderly (CPI-E), which often shows higher expenses in areas like healthcare, a significant part of senior budgets.
The Shortcomings of Current COLA Calculations
Many suggest that the SSA should use the CPI-E to determine COLAs because it more accurately represents the spending realities of older adults. Advocacy groups such as the Senior Citizens League have noted that switching to the CPI-E would have resulted in higher annual increases for retirees, totaling an additional $2,689 over the past decade.
The disparity continues into 2025, where using the CPI-E for COLA calculations would have meant a 3% increase instead of 2.5%, giving retirees an extra $10 monthly. While seemingly small, this amount could nearly cover the expected rise in Medicare Part B premiums, which typically comes directly out of Social Security payments.
Potential for Future Changes in COLA Calculations
Although there are no immediate plans to shift from using the CPI-W to the CPI-E for COLA calculations, the idea has some legislative support and could emerge as part of broader attempts to remedy Social Security’s forecasted funding issues.
For now, retirees may need to rely on personal savings or additional employment to supplement their income, or explore eligibility for other programs like Supplemental Security Income (SSI) to help cover gaps left by their Social Security benefits.
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.
