Personal Finance

Why Your 2025 Social Security COLA Is Probably Too Small

Christy Bieber

Published: January 30, 2025 8:55 am

If you receive Social Security benefits, you are getting a Cost of Living Adjustment (COLA) this year. This means your retirement benefits check is going to be bigger than it was before. That’s the good news.

Unfortunately, there’s some bad news too. Your COLA is probably smaller than it should be, and there is a very good chance you’re going to have less buying power than you did in the past — even though your payment is bigger on paper. Here’s why.

Social Security’s COLA formula has a big problem

Cost of Living Adjustments are supposed to provide retirees with a large enough raise each year that they don’t lose buying power. Since prices increase over time, benefits must also increase. Otherwise, after a few decades of retirement, a senior’s Social Security benefit would buy very little at current prices thanks to the effects of inflation.

The problem with Social Security’s COLAs is that the benefits increases are calculated based on an inflation measure that doesn’t work very well. By law, COLAs are determined by looking at how prices changed year-over-year on the CPI-W index. This is the Consumer Price Index for Urban Wage Earners and Clerical Workers.

The Social Security Administration looks at data from the third quarter of the year to determine if the cost of a basket of goods and services has gone up. If a change to the average CPI-W has occurred compared to the prior year, retirees will get a COLA equal to the percentage increase. Data from the third quarter of 2024, for example, showed that prices were up 2.5% compared with the prior year. As a result, retirees will get a 2.5% benefit increase. A senior receiving $2,000 per month would see their benefit go up by around — minus $10.30 per month to account for rising Medicare premiums, which are normally taken directly from benefits.

The problem, however, is that this isn’t actually an accurate measure of how much inflation retirees have experienced, since the spending habits of seniors are not the same as the spending habits of urban wage earners and clerical workers.

Inflation isn’t being measured correctly for retirees

Retirees tend to spend a good portion of their money on things like healthcare and housing while often spending less on things that urban wage earners and clerical workers use more heavily.  Unfortunately, inflation within the medical industry tends to outpace price increases elsewhere, and housing and rent costs have also been veering sharply upward in recent years.

The fact that CPI-W doesn’t do a good job accurately assessing how much more seniors are paying for things they use has resulted in retirees getting a smaller raise than they need to help them keep up. The consequences of this underestimation of inflation have been serious for seniors. In fact the Senior Citizens League reports that retirement benefits have lost 20% of their buying power since 2010. Retirees should have an extra $4,442 on average to rebuild back to where they were 15 years ago. That’s a huge loss, especially when you consider the average Social Security benefit is just $1,976.

Unfortunately, it’s unlikely that things will change anytime soon to shift to a different inflation measure that provides a fair raise for retirees. Since that’s probably not happening, future workers must be aware of Social Security’s eroding value, while those already retired should be careful about sticking to their budget so they don’t end up in debt or draining their savings too fast as their retirement benefits buy less each year.