For most senior Americans, Social Security is more than just a cheque they get every month. It keeps them stable and gives them peace of mind during their golden years by providing a vital source of income.
Pollster Gallup has been asking people about how much they depend on this important social program for retirees for the past 23 years. The numbers are telling: between 80% and 90% of those who answered say they need their Social Security check to cover at least some of their costs. Of note, this includes 88% of the people polled in April 2024.
What is Social Security’s COLA and How is it Determined?
A lot of older Americans count on Social Security to help them pay their bills, so it’s no surprise that everyone is looking forward to the annual cost-of-living adjustment (COLA) report. The unveiling for this year is coming up in less than two weeks, which is making seniors excited and hopeful.
The COLA adjustment is more than just a percentage change; it’s the balance between staying in the black financially and the fear of inflation that is always there. As the big day gets closer, retirees all over the country hold their breath, hoping for a change that will really make their lives better.
There is some good news for beneficiaries, but the 2025 COLA for Social Security is going to be bad news for seniors.
If prices go up, which is also known as inflation, Social Security recipients get a “raise” every year. This is called the Cost-of-Living Adjustment (COLA). The word “raise” is in quotation marks to make it clear that these increases in Social Security payments are meant to keep up with inflation and not go above and beyond it, like a real raise from a boss might.
In theory, if the prices of a wide range of goods and services that seniors usually buy go up by 3.5% from one year to the next, then Social Security benefits should go up by the same amount. This change makes sure that retirees can keep buying the same amount of goods and services.
COLA is the main way that the Social Security Administration makes sure that people who get benefits don’t lose the ability to buy things.
For the first 35 years, from January 1940 to December 1974, after the first checks were sent to retired workers, changes to Social Security payments were hard to predict. There were no changes to benefits during the whole decade of the 1940s. In the 25 years that followed, only 11 Cost-of-Living Adjustments (COLAs) were made during special meetings of Congress.
Introduction of the CPI-W in 1975
In 1975, something important changed. It was decided that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) would be the official way to measure inflation for figuring out Social Security payment increases every year.
The CPI-W breaks down inflation into different parts, and each part has its own number weighting. This reduces the index to a single number every month, which makes it simple to see how prices have changed from one year to the next and tell if prices are rising (inflation) or dropping (deflation).
How the CPI-W Affects COLA Calculations
The CPI-W is released every month by the U.S. Bureau of Labour Statistics, but the COLA only uses the average numbers from the 12 months that ended in July, August, and September (the third quarter).
It means that prices have gone up if the average CPI-W for the third quarter of this year is higher than the same quarter the previous year. And because of this, people who get Social Security can get a “raise” next year.
The Cost-of-Living Adjustment (COLA) for the next year is based on the percentage difference between the average third-quarter CPI-W readings from one year to the next, rounded to the nearest tenth of a percent.