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Retirees are still feeling the impact of higher prices.
Yet one buffer for the effects of inflation — the Social Security cost-of-living adjustment, or COLA, — may be lower next year.
As the rate of inflation moderates, the Social Security COLA for 2025 might be 3%, according to the latest estimate from Mary Johnson, an independent Social Security and Medicare policy analyst.
That estimate is lower than the 3.2% boost to benefits that more than 66 million beneficiaries saw starting in January. It is also substantially lower than the record 8.7% COLA beneficiaries saw in 2023 and the 5.9% COLA that went into effect in 2022 in response to record-high inflation.
How the Social Security COLA is calculated
The annual adjustments are based on a subset of the Consumer Price Index, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
Every year, the Social Security Administration compares the third quarter CPI-W data for that year with the third quarter of the previous year. If there is a percentage increase from one year to the next, that determines the COLA. However, if there is no increase, there is no COLA.
Because it is still very early in the year, the Social Security COLA estimate may be subject to change.
Why early COLA estimates for 2025 are lower
A look at the latest CPI-W data helps show why the increase is down from the record-high increases retirees recently saw.
The prices for certain categories saw a double-digit percentage decline compared with two years ago as of May. Fuel oil was down 35.3%; airline fares dropped 19.4%; and gasoline declined by 17.7%.
‘Undercounting real senior inflation’
Many retirees coped with inflation by making adjustments, such as cutting back on savings or dipping into existing assets, according to the Center for Retirement Research at Boston College.
“They take a big hit to their future wealth by doing that,” Laura Quinby, senior research economist at the Center for Retirement Research, previously told CNBC.com.
The effects of Social Security’s cost-of-living adjustments vary for individuals based on their personal expenses and where they live, according to Quinby.
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Some experts argue the CPI-W is not a perfect measure for retiree spending. For example, while the CPI-W assumes older adults spend about 66% of their income on housing, food and medical costs, in reality about 75% of their income is devoted to those costs, according to Johnson.
“This disparity suggests that my COLA estimate, which is based on the CPI-W, may be undercounting real senior inflation by more than 10 percent,” Johnson said.
Nevertheless, the latest CPI-W shows where inflation is subsiding and rising — which may ultimately affect next year’s COLA.