A Higher Social Security COLA in 2025 Is All but Impossible

On Oct. 10, retirees who claim Social Security will find out how much their benefits will increase in 2025 with the annual cost-of-living adjustment (COLA) from the Social Security Administration. The COLA aims to help benefits keep pace with inflation and maintain their purchasing power as best as possible.

With extraordinarily high inflation over the last three years, retirees have enjoyed some of highest COLAs in a decade. But the unfortunate reality is that the likelihood of the 2025 increase surpassing this year's figure is all but impossible. Here's why.

Inflation has come down

The COLA is calculated based on inflation data. In 2022, inflation started to accelerate, culminating in some of the highest rates in four decades.

While the cost of living soared, retirees got some relief thanks to the COLA. Here is a look at the adjustments over the last decade.

Data source: Social Security Administration.

As you can see, soaring consumer prices have led to a nearly 18% increase in benefits over the last three years. But the chances of the 2025 increase surpassing the 3.2% COLA adjustment this year are nearly zero.

The Social Security Administration (SSA) calculates the COLA with inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That index differs from the headline inflation number that the broader market so closely follows, but the CPI-W similarly tracks the price changes on a market basket of goods and services.

To set the COLA each year, the SSA looks at the CPI-W during the third quarter of the year (July, August, and September) and compares it to the data from those same months in the prior year. The difference results in the COLA for the following year.

The July and August readings of the CPI-W have now been released, and the year-over-year differences for those two months were 2.87% and 2.35%, respectively. That means the CPI-W would have to rise significantly in September to make the COLA surpass the 3.2% seen this year. That's very unlikely because inflation has been on the decline thanks to rising interest rates over the last two years.

Maybe disappointing, but not unexpected

Considering where inflation had been over the past three years and the Fed's rate-hiking campaign, it makes sense that a higher COLA year over year in 2025 is all but impossible. The Fed's goal has been to slow the pace of price increases. If inflation slows, it only makes sense that the COLA would as well.

Over the years, the COLA probably hasn't helped retirees keep pace with inflation, but the increases to Social Security benefits over the last few years have certainly been welcome. The silver lining in the probable smaller increase is that the cost of living should in theory become more manageable as prices rise at a slower pace, so it's not all bad.

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