In just a few weeks, retirees will start receiving their first Social Security payments for 2025, including the new cost-of-living adjustment (COLA).
The 2025 COLA will increase the average monthly Social Security check to $1,976. While this is a boost, it’s smaller than what many retirees were hoping for, especially after receiving higher increases in the past few years, including a massive 8.7% rise in 2023.
The 2.5% COLA increase for 2025 is far less than what some retirees expected, and many feel it won’t be enough to keep up with rising living costs. But there’s another issue: the way Social Security calculates COLAs could be costing retirees up to $120 more in 2025, and some may even miss out on more money.
How COLA Is Calculated?
Each year, the Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine how much the COLA should be.
This index tracks inflation by looking at the average prices of goods and services during the third quarter of the year, including July, August, and September.
Here’s how the process works:
- The SSA calculates the average CPI-W for the months of July, August, and September in the current year.
- It compares this new average to the same three months from the previous year.
- The difference between the two averages determines the COLA for the following year.
In 2024, the CPI-W increased by 2.5% compared to 2023, which means that Social Security benefits will go up by 2.5% in 2025.
At first glance, this seems fair. However, the CPI-W was designed to reflect the spending habits of households where at least one person is employed for at least 37 weeks during the year. This means that retirees, who often don’t work, are not included in the CPI-W’s data.
What About Retirees?
Retirees have their own set of spending habits, which are often quite different from those of working people.
For example, seniors tend to spend more on healthcare, which often rises faster than other costs. However, they spend less on things like education or commuting. The SSA doesn’t take these differences into account when calculating COLAs for Social Security.
Instead of using the CPI-W, retirees should ideally be tracked by the Consumer Price Index for the Elderly (CPI-E). This index was created to measure the spending habits of adults aged 62 and older, specifically focusing on their unique needs, such as higher medical costs.
Using the CPI-E instead of the CPI-W would likely lead to higher COLAs for retirees.
The Senior Citizens League (TSCL), a nonpartisan senior group, conducted research and found that, had the CPI-E been used for calculating COLAs between 2014 and 2024, retirees would have received higher adjustments in seven out of those ten years. Over that period, retirees would have received $2,689 more in benefits if the CPI-E had been used.
The 2025 COLA Calculation Shortfall
Looking ahead to 2025, the same issue will continue. If the CPI-E had been used, retirees would see a 3% increase in their Social Security checks instead of the 2.5% that’s currently planned.
That 0.5% difference might seem small, but it would add about $10 more per month to the average monthly benefit.
In total, this could give retirees an extra $120 for the year. While it’s not a huge amount, it would be enough to help cover the increase in Medicare premiums that many seniors will face in 2025.
These premiums are typically deducted directly from Social Security checks, so the extra $120 could help offset those higher costs.
Why Hasn’t This Been Fixed?
Although many believe that switching from the CPI-W to the CPI-E would be a fairer way to calculate COLAs, there are no current plans to make this change. Some members of Congress have supported the idea, but so far, it hasn’t gained significant traction.
In order to change how COLAs are calculated, Congress would need to approve a bill, which could take a lot of time. If this change happens, it would likely be part of a larger set of reforms designed to address Social Security’s future financial challenges.
Until then, retirees will have to continue managing with the current COLA system, which doesn’t fully reflect their needs.
To make up for the shortfall, seniors may need to rely on personal savings, income from part-time work, or other government programs. For example, retirees who qualify for Supplemental Security Income (SSI) could receive additional financial support.
What Should Retirees Do?
While the Social Security COLA may not be enough to keep up with rising costs, there are things retirees can do to manage their finances.
First, it’s important to regularly review your budget and look for ways to reduce expenses. For example, switching to more affordable healthcare plans or adjusting spending habits on non-essential items can help make your income stretch further.
Retirees should also explore other government benefits they may qualify for. SSI can help low-income seniors make ends meet, and it’s worth checking to see if you are eligible.
Another option is to look for part-time work. Many retirees are choosing to work part-time, not only to supplement their Social Security income but also to stay active and engaged.
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