Social Security’s 2025 cost-of-living adjustment (COLA) took effect in January, bringing a 2.5% increase in benefits for recipients. This is the smallest pay bump for seniors since 2021. More than half of retired workers indicate that the COLA is insufficient, and the situation has been exacerbated by reaccelerating inflation.
The annual COLAs are intended to maintain the purchasing power of Social Security benefits amidst inflation. The COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the current year compared to the previous year. For 2025, the CPI-W rose by 2.5% in the third quarter of 2024, leading to the same percentage increase in benefits.
However, this figure may underestimate actual inflation. By the end of 2024, the CPI-W had risen to 2.6% in November, and forecasts suggest this trend continued in December. This underestimation means that beneficiaries will see reduced spending power.
The Senior Citizens League, an advocacy group, estimates that Social Security benefits’ purchasing power has declined by 20% from 2010 to 2024 due to insufficient COLAs. One issue is that the CPI-W is based on the spending habits of working-age adults, whose expenses differ from those of retirees.
Social Security COLA falls short
Furthermore, COLAs are based on third-quarter data extrapolated to the whole year, often underestimating actual inflation. In 2023, third-quarter CPI-W inflation was 3.2%, leading to a 3.2% COLA for 2024, but the full-year CPI-W increased by 3.8%. Thus, the 2024 COLA underestimated inflation by 0.6 percentage points.
A similar scenario occurred for the 2025 COLA, where the full-year CPI-W through November had risen by 2.9%, suggesting the actual COLA should have been higher. While these discrepancies might seem minor, they compound over time. For instance, the average Social Security benefit for retirees is set to increase by $49 per month with the 2.5% COLA in 2025.
However, had the COLA been 2.9%, the increase would have been approximately $56 per month. This $7 monthly difference accumulates to an average shortfall of under $100 for the year. For retirees who began receiving benefits in 2023, the cumulative shortfall will exceed $200 in 2025, representing a significant loss in purchasing power.
Despite these challenges, retirees can mitigate some of the impact by taking advantage of elevated interest rates. Financial institutions are currently offering attractive rates on certificates of deposit (CDs) and savings accounts, which can provide some additional income. The persistent issue of underestimating inflation in COLAs highlights the need for a more accurate measure that reflects retirees’ spending habits more closely, ensuring they maintain their purchasing power and financial stability.