Retirees Want Bigger Social Security Cost-of-Living Adjustments (COLAs). Here's the Problem With That.

Social Security's 2.5% cost-of-living adjustment (COLA) for 2025 was nothing to write home about. If you're receiving checks, there's a good chance you saw your expenses increase by more than that amount over the last year.

For years, seniors have been arguing that Social Security COLAs should be higher so their checks stop losing buying power to inflation. There's even a solid proposal for how to increase COLAs in a way that better reflects senior spending, but the situation is complicated by the program's funding problem.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Image source: Getty Images.

Only Congress can change the Social Security COLA calculation. And so far, few ideas have gained traction, likely because of the possibility of unintended consequences.

Many want COLAs calculated using the CPI-E

Right now, the Social Security Administration calculates COLAs by looking at the annual change in third-quarter inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It averages the numbers from July, August, and September for the current year and the last one -- any percentage increase between the two numbers becomes the new COLA. For example, the 2024 Q3 average was 2.5% higher than the 2023 Q3 average, so the 2025 COLA was 2.5%.

There is a problem with the CPI-W, however, because it excludes retirees, focusing instead on households with at least one worker who was employed for at least 37 weeks during the year and households where at least 50% of income came from wages. There's a separate index -- the Consumer Price Index for the Elderly (CPI-E) -- that tracks senior spending habits.

Comparing the two indices reveals key differences in the spending habits of the two groups. For example, seniors are likely to spend more on healthcare than their younger counterparts do. Healthcare costs also tend to rise more quickly than other types of expenses. This can cause senior expenses to climb faster than the CPI-W would indicate.

One analysis from The Senior Citizens League (TSCL), a nonprofit senior group, found that if the Social Security Administration used the CPI-E to calculate COLAs instead of the CPI-W, the average senior would have taken home about $2,689 more between 2014 and 2024. It would also have resulted in larger COLAs in seven of those years.

The problem with switching to CPI-E COLAs

Switching to the CPI-E seems like a straightforward solution, but its long-term consequences are likely a part of what's stopping Congress from making the change. The potential for larger COLAs would also mean increases to Social Security's expenses, and that's a problem.

Social Security has been spending more money than it takes in from tax revenue since 2021. So far, nothing's changed for beneficiaries because the program has made up the difference by taking money out of its trust funds. But that can't last forever.

The latest Social Security Trustees Report predicted Social Security's trust funds would be depleted in 2035. That came out before Congress passed the Social Security Fairness Act, which accelerated the trust funds' depletion by about six months.

Right now, if the government does nothing, Social Security would only be able to pay out about 77.7% of benefits after the trust funds are empty. That said, Congress still has time to agree on a solution to increase funding for the program before such cuts to benefits take effect.

However, any solution will require someone to get stuck with the bill. This could come in the form of a payroll tax increase, which is understandably unpopular with a lot of Americans struggling to pay their bills as it is. Given this situation, it's easy to see why politicians have been reluctant to make changes to Social Security that would cause it to run out of money even faster.

This doesn't mean a switch to the CPI-E for COLA calculations will never happen. It's just more likely to occur as part of broader reforms to Social Security rather than a one-off change.

The $22,924 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

View the "Social Security secrets" »

The Motley Fool has a disclosure policy.