Social Security is one of the most critical -- and expensive -- functions of the federal government. The Social Security Administration (SSA) doles out about $1.5 trillion a year to 68 million Americans, 51 million of whom are retired workers.
Nearly 40% of these retirees rely on SSA payments for at least half of their income, and about 13% of recipients rely almost exclusively on them. The financial health of millions of Americans rests very squarely on the shoulders of Social Security.
Retirees can count on cost-of-living adjustments to their benefits
Whether Social Security benefits play a major role in your retirement or not, you might be wondering how inflation will impact your benefits. As costs rise, will you be forced to tighten the proverbial belt? Luckily, every year the SSA adjusts payments to reflect changing costs with the intention of keeping retirees' standard of living constant. This is known as the annual cost-of-living adjustment (COLA), and it's a big deal for many retirees.
In the early days of Social Security, any adjustments to benefits had to go through Congress. That meant constant political fights and huge stretches of time where no adjustments were made. Lucky for retirees today, an automatic adjustment was instituted in 1975. Since then, almost every year has seen a slight bump in benefits.
This COLA is tied to a specific measure of inflation, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This CPI-W number is calculated and reported by the U.S. Bureau of Labor Statistics (BLS) on a monthly basis. The BLS uses a whole host of data points to try to track inflation across the whole economy and boil it down to one number.
There is some controversy over whether this is the best marker to use and how closely it truly reflects the rising costs retirees face, but it has been used faithfully for almost 50 years.
With inflation on everyone's mind, retirees are keen to know this year's COLA
Although it has cooled in the last year, many Americans are still feeling the impact of inflation from the worst of the coronavirus pandemic. During 2021 and 2022, it was at levels not seen in decades. The Social Security adjustments from both years reflected this circumstance, and 2021 and 2022 saw COLAs of 5.9% and 8.7%, respectively. Both were the largest since the early 1980s.
Those look like great adjustments, but here's the issue -- the CPI-W may not be the best metric to use. It is designed to track the habits of people who are younger and still working. Retirees have different needs and spending priorities. Perhaps the most glaring difference is medical care. This is comparatively a much larger part of a retiree's budget and an area of the economy that often sees higher-than-average inflation.
The CPI-W doesn't account for these sorts of differences. So despite the annual COLA, retirees may be actually losing buying power. The most recent analysis by The Senior Citizens League (TSCL) found that retirees have lost 20% of their Social Security benefit buying power since 2010.
The announcement is coming soon, but we can still make a prediction
If TSCL is correct, whatever COLA is coming likely won't make up for the lost buying power. Still, any bump is better than no bump. So when will we know what 2025's adjustment will be? The annual COLA is announced in October, so you'll have to wait another month for the official number.
It is, however, calculated using the CPI-W numbers from July, August, and September. Since two of those numbers have been released, we have a pretty good idea of what the final number will be. The latest estimate by TSCL is 2.5%, down from last year's 3.2%. The official number will be here soon enough, but it's not likely to diverge too much from this estimate.
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