I’m an Economist: Here’s What the 2025 Social Security COLA Should Be To Keep Up With Inflation
Written by
Yaël Bizouati-Kennedy
Edited by
Melanie Grafil
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Social Security cost-of-living adjustments (COLA) are changes made to reflect the pace of inflation on Social Security benefits, and to ensure that said benefits are “not eroded by inflation,” according to the Social Security Administration (SSA).
Yet, some experts argue that these changes are not keeping up with real prices and, in turn, this is sparking concern about retirees’ financial well-being, many of whom are relying on these benefits in their golden years.
So, how much should the 2025 COLA be to keep up with inflation?
How Is COLA Calculated?
First, it’s important to note that these COLA adjustments are based on a sub-index of the consumer price index (CPI), which is released monthly and is a measure of consumer inflation.
The intent is to use the changes in this sub-index — the consumer price index for urban wage earners and clerical workers (CPI-W) — so “inflation no longer drains value from Social Security benefits,” according to the SSA.
For 2024, the SSA determined a 3.2% COLA. It will announce the next COLA in October 2024, which will be applied to 2025 benefits. To put this in perspective, in 2022, it announced an 8.7% COLA — the highest since 1981, according to SSA data, which reflected the high inflation at the time.
Is It an Accurate Metric?
Many experts, however, argue that this is not a correct metric to use to gage inflation changes for the purpose of Social Security benefits — and that, in turn, these benefits are taking a major hit.
For instance, Martha Shedden, president and co-founder at the National Association of Registered Social Security Analysts, called the use of the CPI-W an “unrealistic representation of what retirees spend money on.”
As she explained, there has been a push to instead use another index, the consumer price index for elderly (CPI-E), which is designed to reflect the spending patterns of households with individuals age 62 or older more accurately.
“Both of these indicators use the same formulas and prices, but their importance is determined differently,” she said, noting, however, that the size for CPI-E is smaller, leading to greater sampling error.
“So, it is not really known how much the CPI-E would change the annual COLA,” she added.
Advocacy groups have been pushing for a change for some time. For instance, The National Committee to Preserve Social Security and Medicare said that as the CPI-E has “been under review for four decades,” the government should adopt it to reflect “a more accurate consumer price index for the elderly.”
What Is the Projected 2025 COLA?
According to an Aug. 14 statement from The Senior Citizens League (TSCL), the COLA will be much lower in 2025 than the current 3.2% adjustment — it’s predicting a 2.57% COLA, down from a 2.63% expectation in July.
Indeed, inflation fell to 2.9% in July, from 3% in June — the first time it’s been below 3% since March 2021, according to the latest CPI released Aug. 14.
But while decreased inflation is good news for consumers, in this case, it’s not for seniors.
TSCL said in the statement that 75% of seniors want Congress to base COLA on the (CPI-E), “a price index that’s specific to seniors, rather than the CPI for Urban Wage Earners (CPI-W), which is better suited to the general population.”
In fact, it added in a separate report that without an accurate COLA, “beneficiaries lose purchasing power.”
And to make up for that loss, it estimated that benefits should be $370.23 per month higher — or $4,442.80 per year.
What Should the COLA Be in 2025 To Keep Up With Inflation?
According to Thomas Savidge, economist with the American Institute for Economic Research, “Social Security needs to make serious changes to keep pace with inflation.”
In his view, COLA should be a flat benefit indexed to inflation instead of indexed to taxable income and age at retirement.
“To make up for the flat benefits, Americans should be allowed to invest a portion of their Social Security payments into a private retirement account, which often yields a higher return on investment than Social Security,” he said.
In terms of how much the rate should be in 2025 to keep up with inflation, experts argue that it’s difficult to pinpoint it exactly.
However, using the CPI-E could be a better option since it focuses on inflation for people 62 and older.
“The CPI-E was introduced in 2008 and is published monthly along with other inflation data. While it isn’t always higher, using it for the 2024 COLA would have resulted in a 0.8% higher increase than the standard method,” said Devin Carroll owner, lead advisor at Carroll Advisory Group.
In turn, he said, if current trends hold, the 2025 COLA would be about 0.3% higher with the CPI-E.
“Using the CPI-E would make the COLA more realistic for seniors by better reflecting the costs they face,” he added. “In 2025, this could put the COLA around 3%.”
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