In a recent update, the forecast for the Social Security Cost-of-Living Adjustment (COLA) in 2025 has raised concerns about the buying power of benefits for retirees. The current COLAs, which are based on a specific measure of inflation, have not been sufficient to keep up with rising prices, leaving many retirees struggling.

Experts believe that a different inflation index, one that tends to reflect higher inflation rates, would be a more appropriate metric for calculating COLAs. If this alternative index is considered, it is predicted that the 2025 COLA will underestimate the impact of rising prices, resulting in Social Security benefits losing even more buying power.

The determination of COLAs is a critical aspect of the Social Security program, as it is supposed to compensate recipients for the lost buying power of their benefits. However, it is becoming increasingly questionable whether the current COLAs are fulfilling this objective. According to The Senior Citizens League, two-thirds of surveyed seniors stated that the 2024 COLA failed to cover their increased household expenses. Additionally, half of surveyed retirees expressed concerns that significant spending cuts would be necessary to keep up with inflation, according to the Employee Benefit Research Institute.

These statistics suggest that Social Security benefits have already lost buying power. Unfortunately, the latest forecast for the 2025 COLA indicates that the situation may worsen next year, compounding the challenges faced by retirees.

Based on the most recent update by The Senior Citizens League, Social Security benefits are currently projected to receive a 2.6% COLA in 2025. This calculation relies on the inflation changes observed in the third quarter of 2024, using a subset of the Consumer Price Index known as the CPI-W. The finalized COLA figure will only be determined once the September CPI-W data becomes available in early October, as calculated by the Social Security Administration.

The nonprofit advocacy group, The Senior Citizens League, closely monitors monthly CPI-W data, enabling them to provide predictions on upcoming COLAs. Their updated forecast, based on June CPI-W data, suggests that Social Security benefits are on track to increase by 2.63% in 2025, a slight rise from the previous forecast of 2.57%. However, since COLAs are rounded to the nearest tenth of a percent, both figures effectively round to 2.6%.

If the projection holds true, recipients can expect an average increase of approximately $49.77 per month ($597.24 for the full year) for retired-worker benefits, and an average increase of around $23.63 per month ($283.56 for the full year) for spousal benefits.

The current method of using the CPI-W as the inflation gauge for Social Security beneficiaries has raised concerns among policy experts. These experts, including Joel Eskovitz, senior director of Social Security at AARP, argue that the Consumer Price Index for the Elderly (CPI-E) would be a better metric. Unlike the CPI-W, which reflects the spending habits of hourly workers, the CPI-E focuses on individuals aged 62 and older, placing greater emphasis on categories such as housing and medical care. The CPI-E consistently outpaces the CPI-W by two-tenths of 1% annually. This implies that, if the CPI-E were considered, COLAs would typically be two-tenths of 1% higher, indicating a loss in the buying power of benefits over time.

Unfortunately, this trend of eroding buying power has been particularly noticeable in 2024. The available data shows fluctuations in both the CPI-E and CPI-W throughout the year, underscoring the need to reassess the inflation index used for calculating COLAs.

As retirees await the finalized 2025 COLA figures in October, concerns about the buying power of Social Security benefits persist. Revising the inflation measure to better reflect the spending habits of seniors could be crucial in safeguarding their financial well-being.