The Significant Challenge Facing Social Security's 2025 Cost-of-Living Adjustment
The Significant Challenge Facing Social Security's 2025 Cost-of-Living Adjustment
Every year, the highly anticipated announcement regarding the Social Security program's cost-of-living adjustment (COLA) holds significant importance. Numerous elderly individuals rely on Social Security for a substantial portion of their retirement income. Consequently, they depend on COLAs to maintain their living expenditures from one year to another.
On October 10, the Social Security Administration announced several modifications to the program, effective as of 2025. Included in these changes was news of a projected 2.5% COLA.
Unfortunately, many senior citizens have expressed disappointment with this news considering the relatively modest size of a 2.5% increase. To make matters worse, 2025's 2.5% raise fails to match up to the previously received COLAs.
To illustrate, at the start of 2024, Social Security benefits underwent an increase of 3.2%. In the year preceding that, seniors experienced a significant 8.7% COLA. Within this context, a 2.5% rise seems rather unremarkable.
However, 2025's minimal Social Security COLA isn't the primary concern. Instead, there exists an even more pressing issue with 2025's COLA that necessitates immediate attention from legislators.
A systemic flaw
In actuality, a 2.5% Social Security COLA is not entirely unwelcome if we assess it based on its relative alignment with the typical raise of the past decade. The problem, however, revolves around the fact that seniors who depend on Social Security often witness a decline in their purchasing power year after year, regardless of the size of their COLA.
The Senior Citizens League reported last year that Social Security beneficiaries had lost approximately 36% of their purchasing power since 2000 due to insufficient COLAs. This issue has been further exacerbated by 2025's underwhelming raise.
The fundamental issue can be traced back to the method employed in calculating Social Security COLAs. These adjustments are determined based on quarterly changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, CPI-W is not an accurate gauge of the expenses typically encountered by seniors on Social Security or the rate of their increase.
CPI-W examines the expenditures of wage earners. The majority of Social Security beneficiaries are retirees and, consequently, do not generate income from wages (though it is permissible for retirees to work and collect Social Security concurrently).
As a concise example, senior citizens often allocate a substantial portion of their income towards healthcare expenses. Wage earners may also allocate a significant portion of their earnings to healthcare, but to a lesser extent than senior citizens on Social Security.
Additionally, CPI-W focuses on expenditures in urban areas. It cannot be assumed that senior citizens on Social Security reside in these same urban areas. In fact, living costs in rural areas can vary significantly from those in urban areas, and retirees on Social Security may not require or desire access to employment opportunities.
Consequently, CPI-W does not serve as an effective tool for measuring inflation rates that affect senior citizens on Social Security. As a result, their purchasing power has been gradually diminishing over the years. And 2025's modest COLA will likely contribute to this continued loss of purchasing power, despite not being the smallest raise ever announced.
A necessary shift
To prevent senior citizens on Social Security from losing purchasing power year after year, legislators could consider implementing changes to the way the program's COLAs are calculated. The implementation of a senior-specific index, like the Consumer Price Index for the Elderly (CPI-E), could offer a more accurate representation of the costs faced by Social Security recipients and could potentially facilitate better financial management for them in the face of inflation.
At present, there is no room for intervention with regard to 2025's Social Security COLA, as the 2.5% increase has been confirmed. Seniors who derive the majority of their income from Social Security will need to exercise caution when managing their expenditures to optimize their use of this COLA. However, the aim is for lawmakers to prioritize a review of the existing system in an effort to prevent seniors from losing purchasing power at such an alarming rate in the future.
Seniors who rely heavily on Social Security for their retirement income might find it challenging to maintain their living expenses with a 2.5% cost-of-living adjustment (COLA), as this increase falls short of previous COLAs in 2024 and 2023. The current method of calculating Social Security COLAs based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) may not accurately reflect the expenses faced by retirees, leading to a consistent decline in their purchasing power over the years.