Social Safety advantages received a 3.2% cost-of-living adjustment (COLA) in 2024, a smaller increase than the historic 8.7% COLA doled out in 2023. Sadly, retired employees are on tempo to get an excellent smaller pay bump of two.6% in 2025, in response to The Senior Residents League, a non-profit advocacy group.
What makes that regular decline stunning is that many seniors report going through monetary hardships. The 2023 Retirement Confidence Survey (RCS) carried out by the Worker Profit Analysis Institute reported that “58% of retirees are involved they should make substantial cuts to their spending resulting from inflation.”
That quantity ticked all the way down to 56% this yr, however the pattern continues to be intact. In reality, the 2024 RCS discovered that 26% of retirees lack confidence of their capacity to finance retirement, and inflation is the most typical motive for that insecurity. These statistics beg the query: Are Social Safety advantages really maintaining tempo with inflation?
That query is not possible to reply as a result of inflation impacts every individual otherwise. However the 2025 COLA forecast exposes a flaw in the best way COLAs are calculated which will make clear the scenario. Learn on to study extra.
Picture supply: Getty Photographs.
There’s a main flaw within the Social Safety COLA calculation
Social Security benefits get annual cost-of-living adjustments (COLAs) to assist retired employees and different recipients hold tempo with rising costs. These COLAs are primarily based on how inflation adjustments within the third quarter, that means the three-month interval that features July, August, and September.
Inflation is measured utilizing the Client Worth Index for City Wage Earners and Clerical Employees (CPI-W), a subset of the higher recognized CPI-U. The calculation itself is easy: The third-quarter CPI-W within the present yr is split by the third-quarter CPI-W from the prior yr, and the % enhance (if any) turns into the COLA within the subsequent yr.
Here is an instance: The CPI-W elevated 3.2% within the third quarter of 2023, so Social Safety advantages elevated 3.2% in 2024. In that sense, COLAs successfully reimburse retirees and different Social Safety recipients for the shopping for energy advantages misplaced within the earlier yr.
That brings me again to the estimated 2.6% COLA in 2025. The forecast is problematic as a result of the CPI-W elevated 3.2% through the first quarter of 2024. If we assume the COLA forecast is appropriate, the CPI-W should fall sharply within the fourth quarter for the two.6% COLA to sufficiently compensate Social Safety beneficiaries for misplaced shopping for energy.
Restated in less complicated phrases: The COLA calculation is flawed as a result of it extrapolates third-quarter CPI-W knowledge to the total yr. That solely works if CPI-W inflation rises and falls easily over lengthy intervals, such that any discrepancies between the annual change in CPI-W and Social Safety COLAs common out over time.
Nonetheless, the present methodology could be problematic if the CPI-W usually spikes within the first, second, or fourth quarters. In that state of affairs, the annual change in CPI-W might usually exceed the Social Safety COLA, that means shopper costs might persistently enhance quicker than advantages. Sadly, that has occurred as a rule over the previous decade.
How the flaw within the Social Safety COLA calculation has impacted advantages
The CPI-W elevated most sharply within the first quarter throughout 2017, 2020, and 2023. It elevated most sharply within the second quarter throughout 2014, 2018, 2019, and 2022. And it elevated most sharply within the fourth quarter throughout 2016 and 2021. In different phrases, inflation peaked earlier than or after the third quarter in 9 of the final 10 years.
Put otherwise, 9 of the final 10 COLAs didn’t account for probably the most aggressive will increase in shopper costs. Because of this, CPI-W inflation elevated extra shortly than COLAs over the past decade, that means Social Safety advantages (arguably) misplaced shopping for energy.
The chart beneath exhibits the common and whole will increase within the annaul CPI-W, in addition to the common and whole will increase in Social Safety advantages (i.e., the COLAs) over the past decade.
|
12 months |
CPI-W (P.c Change) |
Social Safety COLA |
|---|---|---|
|
2014 |
1.5% |
1.5% |
|
2015 |
(0.4%) |
1.7% |
|
2016 |
1% |
0% |
|
2017 |
2.1% |
0.3% |
|
2018 |
2.5% |
2% |
|
2019 |
1.7% |
2.8% |
|
2020 |
1.2% |
1.6% |
|
2021 |
5.3% |
1.3% |
|
2022 |
8.5% |
5.9% |
|
2023 |
3.8% |
8.7% |
|
Common |
2.7% |
2.6% |
|
Complete |
30.4% |
28.6% |
Information supply: Social Safety Administration, U.S. Labor Division.
As proven above, shopper costs elevated 30.4% through the decade that resulted in 2023, whereas Social Safety COLAs elevated advantages by simply 28.6%. Meaning COLAs fell wanting inflation by almost 2 proportion factors.
Put otherwise, the common annual enhance within the CPI-W was 2.7% over the last decade, whereas the common annual COLA for Social Safety advantages was 2.6%. Meaning COLAs trailed inflation by one-tenth of a proportion level per yr.
These variations could appear insignificant, however the discrepancies are extra substantial by way of {dollars}. The typical retired employee obtained $1,264 monthly in January 2013. COLAs would have elevated that payout 28.6% to $1,626 monthly in January 2023, however the common profit (arguably) ought to have elevated 30.4% to $1,648 monthly. The distinction is about $22 monthly or $264 per yr.
Nonetheless, that solely tells a part of the story. Particularly, we are able to say the common retired employee would have obtained an additional $264 in 2023 if COLAs had matched the annual will increase in CPI-W over the past decade. However what concerning the whole misplaced revenue? If retired employees ought to have obtained an additional $264 in 2023, how a lot further revenue ought to they’ve obtained through the previous decade? The reply is $1,756.
In different phrases, if Social Safety COLAs had tracked CPI-W inflation, the common retired employee would have obtained a further $1,756 through the decade that resulted in 2023. That sum just isn’t monumental, however I doubt anybody would flip it down. Moreover, that flaw within the COLA calculation could clarify why so many seniors are going through a point of economic hardship.
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