When workers retire, the majority of them become dependent, at least in some ways, on Social Security income. This is why it is critical that the program undergoes a yearly cost of living adjustment (COLA) so that individuals who are now on a fixed income can make ends meet and keep up with inflation and the rising cost of living.
Even while it may appear to be a small percentage of the population, approximately 70 million Americans get some type of public assistance, and nearly 52 million retirees will receive a retirement cheque in 2024. According to a Gallup poll, 88% of the 52 million retirees regard Social Security to be an essential source of income.
Despite its popularity and the number of people who get payments, the majority of people have remarkably little correct understanding about how the program operates, with many believing that Social Security is not inflation-proof. This could explain why, according to the same Gallup poll, Americans have ranked inflation as their top financial concern for the past three years.
How Social Security’s annual COLA is calculated
The Bureau of Labour Statistics provides the Consumer Price Index, which is used to calculate the Social Security COLA. The index utilised is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
It calculates inflation based on how prices change over time in eight major spending categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services, and assigns a weight to each category based on how it affects the specific index.
The number for the third quarter of the year (readings in July, August, and September) is then divided by the same number from the previous year, and the resulting percentage increase is the COLA in the following year.
Many people believe that the index utilised is insufficient to meet the demands of seniors because the needs of current workers and the old or disabled are not the same, particularly in terms of healthcare and housing. For years, there has been a proposal to utilise the CPI-E, which uses the same categories as the CPI-W but gives extra weight to the categories in which the elderly spend the most.
The 2025 COLA
However, the COLA for 2025 has been set in stone. There will be a 2.5% rise in all Social Security benefits, not just retirement benefits, beginning in January.
Beneficiaries will receive a notification from the Social Security Administration (SSA) in December explaining the exact increase to their benefits, but as a general guideline, please see the table below for how the increase will affect the average Social Security benefit in each of the programs managed by the SSA.
| Beneficiary | Average Social Security Benefit (Before COLA) | Average Social Security Benefit (After COLA) | Additional Monthly Income |
| Retired workers | $1,924 | $1,972 | $48 |
| Spouses | $910 | $933 | $23 |
| Survivors | $1,509 | $1,547 | $38 |
| Disabled workers | $1,542 | $1,581 | $39 |
A lot of people have said that the 2025 COLA is too small and won’t be enough to meet the needs of the people it affects.
Two things should be thought about about that sentence. First, benefits were never meant to replace all the money a worker loses when they leave. The fact that a lot of people count on benefits goes against how the program was meant to work.
The second one says that a smaller COLA is good because it means inflation is lower.
The measure that is used to figure out the COLA would have to change for inflation to go down in order to get a bigger COLA. Congress has not yet made that choice.