The history being made with Social Security is likely to come, once again, at the expense of the program's retirees.
In May, more than 51 million pensioners received an average Social Security check of $1,916.63, or about $23,000 a year. While America’s most prominent retirement program won’t make its recipients rich, the income it provides helps build a financial foundation for most seniors.
In April, the Gallup National Poll surveyed retirees to gauge how much their Social Security income was needed to make ends meet. Eighty-eight percent of respondents said Social Security payments were a “primary” or “secondary” source of income. In fact, more than two decades of annual Gallup polls have shown that 80% to 90% of retirees would struggle to make ends meet without Social Security.
With about nine in 10 retirees relying on their Social Security check in some capacity, it should come as no surprise that the cost-of-living adjustment (COLA) release during the second week of October is the most anticipated announcement each year.
Source: Getty Images.
What is the purpose of Social Security COLA, and how is it calculated?
As you’ve probably noticed, the prices of the goods and services you buy fluctuate regularly. They can rise (known as inflation) or fall (deflation) over time. The job of Social Security’s cost-of-living calculation is to take into account changes in prices across a broad basket of goods and services and ensure that these changes are reflected in the income that beneficiaries receive.
In simpler terms, if the price of a basket of goods and services that seniors regularly buy rises from year to year, Social Security checks should, ideally, rise by the same percentage to ensure that recipients do not lose any purchasing power.
Prior to 1975, there was no reason or rationale for cost-of-living adjustments. They were passed arbitrarily through special sessions of Congress, and no adjustments were made throughout the 1940s.
Beginning in 1975, the Consumer Price Index for Urban Workers and White-collar Employees (CPI-W) has become the permanent inflationary measure used by Social Security to calculate annual living costs. The CPI-W includes eight major spending categories and countless subcategories, each with its own unique weights.
These individual weights are what allow the CPI by week to be broken down into a single number each month, which can then be easily compared to previous months or years to determine whether inflation or deflation has occurred.
Calculating the Social Security cost-of-living adjustment is simple. The average CPI reading for the third quarter of the current year (only July through September readings are used in the cost-of-living calculation) is compared to the average CPI reading for the third quarter of the previous year. If the average reading increases, it indicates inflation and recipients will receive a larger benefit next year.
For those curious, the percentage difference in the average third-quarter CPI reading from year to year, rounded to the nearest tenth of a percent, determines the cost of living for the coming year.
Above-average inflation has pushed up the cost of living over the past three years. Inflation in the United States Data by Way Charts.
The last Social Security cost of living adjustment was in 1993.
While we don’t have any of the individual CPI readings that can be factored into the 2025 cost of living calculation yet, the annual CPI readings through May 2024 offer great clues about what’s to come. In particular, the individual CPI readings suggest that Social Security’s cost of living is on track to do something not seen since 1993.
In mid-June, the U.S. Bureau of Labor Statistics released its May inflation report, which showed that the consumer price index for U.S. workers rose 3.3% year-over-year. That’s a tenth of a percentage point lower than the 3.4% increase in the April inflation report. (Note: This article was written before the June inflation report was released on July 11.)
While the prevailing inflation rate slowed slightly in May, at least one estimate suggests that the Social Security cost-of-living adjustment could make history in 2025.
According to Mary Johnson, an independent Social Security and Medicare policy analyst who previously worked at the nonpartisan advocacy group for seniors The Senior Citizens League before recently retiring, the cost of living by 2025 is on track to rise 3 percent.
Based on Social Security’s cost-of-living history over the past two decades, a 3% cost-of-living adjustment is quite large. Since 2010, there have been three years with no cost-of-living adjustments (2010, 2011, and 2016), plus another year with the lowest cost-of-living adjustment on record (0.3% in 2017).
But over the past three years, Social Security’s cost-of-living adjustments have come in well above the two-decade average of 2.6%. In 2022, 2023 and 2024, recipients will see their checks rise by 5.9%, 8.7% and 3.2%, respectively. The 8.7% increase passed last year was the largest since 1982 and the largest nominal dollar boost to Social Security checks since the program’s inception.
What makes things “historic” is whether Johnson’s 3% cost of living estimate proves correct. If so, it would mark the first time in 32 years that the total cost of living has been at least 3% four times in a row (cost of living from 1988 to 1993 ranged from 3% to 5.4%).
In dollar terms, a 3% cost-of-living adjustment would increase the average retired worker benefit by about $57 per month in 2025. Meanwhile, disabled workers and survivor beneficiaries would see their monthly payments increase by an average of $46 and $45, respectively.
Retirees are still being treated unfairly.
On paper, you might think that four consecutive years of above-average living costs would put retirees in good stead — but that couldn't be further from the truth.
In May of last year, when the Seniors Association released its 2024 cost-of-living guidance, it also released a study that compared cumulative living costs since the start of the 21st century with price changes for a broad basket of goods and services that seniors regularly purchase. While cumulative living costs between January 2000 and February 2023 increased benefits by 78%, the prices of dozens of goods and services that retirees typically purchase increased by 141.4%.
The bottom line of the Seniors League's analysis is that Social Security income has lost 36 percent of its purchasing power since the beginning of this century.
The bigger problem here is that the factors that are responsible for supporting the prevailing inflation rate are the expenses that are most important to seniors. Compared to the average working American, seniors spend a much higher percentage of their monthly budget on housing and medical care.
Shelter has the largest weighting in the individual CPI of any category. As the Fed embarked on its most aggressive rate-hiking cycle in four decades, mortgage rates have soared, and existing home sales have stalled. Unsurprisingly, rent inflation has remained stubbornly high, giving the individual CPI a boost.
In recent months, we have also seen a rise in the inflation rate in medical services.
Even if the Social Security cost-of-living adjustment for 2025 comes in at 3%, or slightly higher than Johnson estimates, it is unlikely to be a “big enough” increase to offset the inflation that retirees are currently experiencing. In short, retirees are likely to suffer a big loss again in 2025.
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