In 2022, the U.S. was hammered by the fiercest inflation it had faced in four decades amid the lingering macroeconomic disruptions and supply chain issues that followed the COVID-19 pandemic. As a result, in January 2023, Social Security beneficiaries got an 8.7% cost-of-living adjustment (COLA) -- the largest increase since the early 1980s. But many retirees are still struggling.
According to the 2024 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, more than one-quarter of retirees lack confidence in their ability to live comfortably in retirement. Inflation was the most common reason for that lack of confidence. Additionally, more than one-half of retirees who responded said they were worried they would need to make significant spending cuts to compensate for rising prices.
Given that, it's natural that many retirees are eager to know how much their benefits will increase next year. We are still many months away from learning officially what 2025's COLA will be, but The Senior Citizens League recently updated its forecast again.
Image source: Getty Images.
Social Security COLAs are determined by inflation
Social Security's annual COLAs are based on the inflation rate in the third quarter of each year -- July through September. The specific measure used is a subset of the Consumer Price Index (CPI) known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks a basket of prices designed to reflect what those workers spend their money on.
However much the CPI-W increases year over year during the quarter (if it does), that's what the following year's COLA will be. For instance, the 3.2% COLA applied to Social Security benefits in 2024 reflects a 3.2% increase in the third-quarter CPI-W in 2023.
The Social Security Administration can't calculate the 2025 COLA until the Labor Department publishes September's CPI-W data in October. That means all estimates made before any real data has come in are subject to change, though forecasts will become increasingly accurate as October draws nearer.
The good news: Social Security benefits may get a larger COLA than previously expected
CPI-W inflation accelerated sequentially in February and March, then decelerated in April. Due to that back and forth, The Senior Citizens League has already revised its forecast for 2025's COLA several times. And with each subsequent revision, its forecast has increased.
In January, the nonprofit and nonpartisan advocacy group projected that Social Security benefits would increase by 1.4% next year. But it raised its 2025 COLA forecast to 1.8% in February, 2.4% in March, 2.6% in April, and 2.7% in May as the decline in inflation stalled in the neighborhood of 3% to 3.5%.
If the group's latest estimate is accurate, the average retired worker's monthly benefit will increase from $1,915 in April 2024 to $1,967 in January 2025. In other words, a 2.7% COLA means the average retiree will receive an extra $51 per month (or $612 for the full year) in Social Security benefits in 2025.
The bad news: Social Security benefits may lose some buying power in 2025
As mentioned, the Social Security COLA for any given year depends on how the third-quarter CPI-W changed during the previous year. The COLAs are intended to compensate for the loss of buying power caused by inflation in the preceding year.
With that in mind, the average CPI-W through the first four months of 2024 was 3.2% higher than the average CPI-W through the first four months of 2023. In that context, a 2025 COLA of 2.7% is potentially bad news for beneficiaries because the CPI-W has been rising more steeply than that.
If that trend persists -- that is to say, if the full-year CPI-W increases more than the third-quarter CPI-W in 2024 -- Social Security benefits will lose some buying power in 2025. So, retired workers and other beneficiaries may feel like they have less money next year despite the cost-of-living increase.
As a small consolation, interest rates are at their highest levels in two decades, so moving cash to a high-yield savings account would be a good way to make a bit of extra money right now.
What stocks should you add to your retirement portfolio?
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now. The 10 stocks that made the cut could produce monster returns in the coming years, potentially setting you up for a more prosperous retirement.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $703,539!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
