In about two months, retirees will be eagerly anticipating important financial news: the cost-of-living adjustment (COLA) for 2025 from Social Security will be announced in mid-October. Based on what we know now, Social Security payments will likely go up by 2.6% to 2.7%. Some estimates, though, say that the real COLA for 2025 could be even higher.
It is important to know how the Social Security COLA is calculated in order to understand these predictions. The main reason for these changes is to protect Social Security benefits from inflation. This will help retirees keep their buying power over time. As you might expect, the COLA is closely linked to data about inflation.
How Social Security COLA is calculated for retirees
The Consumer Price Index for All Urban Consumers (CPI-U), also known as the “headline” inflation number, is not used by the Social Security Administration (SSA), despite what many people may think. The SSA instead uses the CPI-W, which stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-W measures how changes in prices affect people living in cities where more than half of the family income comes from hourly or salaried work.
The SSA figures out the yearly COLA by looking at the difference, if any, in the percentage rise between the average CPI-W for the third quarter (Q3) of this year and the average CPI-W for the same quarter last year. Then, this percentage rise is rounded up to the tenth of a percent. People who get Social Security will not get a COLA for that year if there is no raise.
- Why do some people expect a higher COLA than projected? The reason is simple: they might anticipate that inflation will rise enough in the third quarter to exceed the projected range of 2.6% to 2.7%.
Since 1974, every year the average CPI-W has been higher in the third quarter than in the second quarter. The year-over-year average CPI-W has also been higher every year except for three during this time. Based on past trends, there is a good chance that the CPI-W will go up again in the third quarter of this year.
Influence of oil prices
The yearly inflation rate has been going down since June 2022, but that is likely to change in the third quarter. A big reason is that oil prices are expected to go up, which makes many other things more expensive.
Even though oil prices have recently gone down because of worries about a possible recession after a jobs report in July that was worse than predicted, some people think these worries are not as strong as they seem. The rise in unemployment wasn’t because of people losing their jobs; it was because so many people started looking for work again.
Uncertainty and expectations
Of course, this prediction is not set in stone; a lot can happen in a short amount of time. The exact amount of the 2025 Social Security COLA won’t be known until October. No matter what happens, one thing is certain: inflation will continue to be hard for seniors long before any possible benefit increases take effect.
For retirees, the cost-of-living adjustment is very important because it keeps their buying power even as prices go up. This change is made every year to help make sure that Social Security payments continue to provide enough money to cover basic needs. When prices go up, the COLA is very important for seniors’ ability to keep their money safe.
Many retirees who count on Social Security benefits for their daily lives are looking forward to hearing about the 2025 cost-of-living adjustment. There are reasons to think that the COLA could be higher, even though current predictions point to a modest rise.
Several important factors, including how the CPI-W has behaved in the past and changes in oil prices, will come together to determine the final fix. Even if the result is different, retirees will still have to deal with money problems, and they are hoping that this change will help.
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