Over 51 million retired workers who depend on Social Security got an average monthly payment of $1,918.28 in June. That’s a little more than $23,000 a year. This amount might not seem like much, but for decades, Social Security has been an important source of income for retirees, helping them pay their bills.
A big part of cutting poverty has been Social Security. It raised 22.7 million people above the government poverty line in 2022 alone, including 16.5 million adults aged 65 and up. Every year for the past 23 years, Gallup polls have shown that between 80% and 90% of retirees rely on their Social Security benefits to meet their financial needs.
Because of this, it makes sense that beneficiaries are looking forward to hearing about the annual cost-of-living increase (COLA) in October. Even though some people think the 2025 COLA could be a big deal, many users may still not be satisfied with it.
The impact of the COLA on Social Security
But why is the COLA for Social Security so important for retirees? Prices of goods and services change over time. The COLA’s job is to make sure that seniors don’t lose the ability to buy things by adjusting their benefits every year to keep up with these changes.
There wasn’t a set way to make these changes before 1975. That year, Social Security started using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to track inflation and make changes to payments based on that.
The CPI-W has a lot of different spending groups and subcategories, and each one has its own weighting. Because of these weightings, the CPI-W can be given as a single number every month, which makes it easy to compare to months or years past.
Only the CPI-W numbers from the third quarter of the year (July through September) are used to figure out the COLA. If the average CPI-W for the third quarter of this year is higher than it was for the same quarter last year, then there has been inflation, which means that Social Security payments will go up.
The increase in benefits for the next year is based on the percentage rise in the average CPI-W for the third quarter, rounded to the nearest tenth of a percent.
Due to above-average inflation, COLAs have been very high over the last three years. In the past 15 years, COLAs have been small or nonexistent most of the time.
However, in 2022, 2023, and 2024, they were 5.9%, 8.7%, and 3.2%, respectively. In 2023, monthly payments went up by 8.7%, which was the biggest increase in 41 years and the biggest nominal increase since the program began.
It was after the June inflation report from the U.S. Bureau of Labor Statistics that projections for the 2025 COLA were made better. The Senior Citizens League (TSCL), a nonprofit group that advocates for seniors, thinks that the rate will go up by 2.63%, which is probably close to 2.6%.
Mary Johnson, a social security and Medicare policy expert who works on her own, has predicted a 2.7% rise. There are 51.2 million retired workers who would get an extra $49.88 to $51.79 a month from a 2.6% to 2.7% COLA in 2025.
This would bring the average monthly income close to, but still below, $2,000. Checks for other beneficiaries, like the 5.8 million widow beneficiaries and the 7.2 million workers with disabilities, would go up by $39.98 to $41.52 and $39.20 to $40.71 each if the COLA stays the same.
On the surface, four years in a row of above-average COLAs may seem like good news for retirees, but the reasons behind these increases are scary. Americans of working age and seniors spend their money in different ways. The CPI-W has been used to figure out Social Security’s COLA for almost 50 years.
It shows how wage earners and office workers in cities spend their money. These are mostly working adults who don’t get Social Security payments. This difference means that the index doesn’t properly show how much inflation seniors, who make up 86% of Social Security’s nearly 68 million recipients, have been experiencing.
One big problem for retirees is that the cost of housing and medical care has continued to rise quickly. The Consumer Price Index for All Urban Consumers (CPI-U) showed that the rates of inflation for housing and medical care services over the previous 12 months were 5.2% and 3.3%, respectively, in June.
Even if the 2025 COLA is the same as 2.7% that Mary Johnson predicted, it would not be enough to cover the rising costs that seniors have to pay for.
This difference would mean that most Social Security recipients would lose spending power. This is the latest in a long line of problems that has been happening with Social Security income since the turn of the century.
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