Every year, a Cost-of-Living Adjustment (COLA) is made to Social Security benefits. However, contrary to popular belief, the COLA is also applied to other government benefits.
The applicable COLA is determined using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is a percentage-weighted indicator that considers eight areas of life expenses, such as housing and medical bills.
The COLA for benefits compares the third quarter’s CPI-W (July, August, and September) to the previous year’s amount. The resulting percentage represents the COLA rise. The 2025 COLA, which is usually issued in October, will apply to benefits in 2025 and will be 2.5 percent.
The 2025 impact of the COLA on Social Security benefits
There are a few major issues with the COLA that many recipients have highlighted throughout the years. The first issue is that in times like this, inflation can soon outpace the COLA rise, rendering it ineffective.
This occurred in 2024, when the 3.2% increase was reached by inflation in the first half of the year, and while it has calmed down somewhat as a result of efforts by the Federal Reserve and the government as a whole, the situation is likely to reoccur in 2025.
The hike was announced two months ago, and costs for vital necessities such as groceries, housing, and public transit have continued to rise.
The second issue is that the index used to calculate the COLA is geared toward young urban professionals rather than the elderly, disabled, or disadvantaged population, who typically spend more on housing and medical costs (some of the fastest rising costs overall) than any other group of people.
Another index that some supporters have said might be more appropriate for these persons’ circumstances is the CPI-E, which has the same categories as the CPI-W but gives more weight to housing and medical costs when calculating the increase.
This index is generally always higher than the CPI-W, implying that if utilized, beneficiaries would receive a more constant increase in benefits.
Another issue with the system’s structure is that, because recipients are regarded to have a fixed income and the raise always occurs after expenses have grown, there is no way for them to avoid losing purchasing power over time.
Many people must tap into their savings on a regular basis or rely on other benefits (such as the Supplemental Nutrition Assistance Program, or SNAP) to get by. This means they will never be able to return their savings because Social Security is not designed to do so, and they will never receive an increase sufficient to pay all of their expenses.
For individuals who have good savings and assets, this can be salvaged; however, others who live paycheck to paycheck require additional government assistance to maintain a decent quality of living, which would not be as significant if the increase was more sufficient to their requirements.
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