Each year, the Bureau of Labor Statistics calculates the cost of living adjustment (COLA), which determines how much Social Security benefits will increase. As a result, learning more about this annual rise is critical for the more than 70 million recipients who rely on these benefits to cover their basic living expenditures.
For the past 23 years, Gallup has conducted annual surveys to determine seniors’ reliance on Social Security benefits. Since 2002, 80% to 90% of respondents, including 88% in April 2024, have claimed that their Social Security benefits are required to make ends meet.
The new COLA increase and its impact on Social Security benefits
The annual COLA announcement by the Social Security Administration (SSA) is the most anticipated news for recipients, according to poll data. After many months of anticipation, the final percentage was published on October 10, but because the 2.5% COLA rise is much lower than last year, it delivered both good and bad news for Social Security beneficiaries in the next year.
The cost of living adjustment (COLA), which you’ve certainly heard about for weeks, is the Social Security Administration’s technique for modifying Social Security benefits to reflect the impact of inflation. Consider this scenario: the cost of acquiring a wide range of goods and services rises by 3%.
If Social Security payouts do not increase, retirees’ purchasing power will eventually diminish owing to inflation (increased costs). To keep recipients from losing purchasing power, the COLA is merely the “raise” that is handed on most years.
When Social Security was first established in 1935 and continued until 1974, there was no logic or reasoning behind payment modifications. A little over a decade after the first retired worker’s cheque was sent in January 1940, Congress passed the first COLA during a lame-duck session.
In addition, starting in 1975, price fluctuations were recorded using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This enabled annual cost-of-living adjustments, a huge advancement for America’s leading retirement program.
How is the cost of living adjustment calculated?
Despite the fact that the CPI-W is reported monthly, Social Security’s COLA computation only considers the trailing 12-month numbers that end in the third quarter (July, August, and September).
If the average Q3 CPI-W measurement for this year exceeds that for the same period last year, Social Security checks will increase. The percentage change in average Q3 CPI-W readings from year to year, rounded to the nearest tenth of a percent, reflects how much of the increase is distributed to recipients.
In the 2010s, beneficiaries have little to look forward to. This decade had only three years of deflation in the last half-century, resulting in no COLA passed on (2010, 2011, and 2016) and the smallest positive COLA on record (0.3% in 2017). The tide, however, has shifted significantly in recent years.
The COVID-19 outbreak caused the largest yearly increase in the US money supply, driving the current inflation rate to a four-decade high. After a decade of primarily low COLAs, beneficiaries earned increases of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024.
On October 10, following the release of the final puzzle piece required to calculate Social Security’s 2025 COLA (the September inflation data), the SSA announced that beneficiaries’ monthly benefits would rise by 2.5% in the coming year.
Despite being the least significant rise in benefits over the preceding four years, it represents an above-average improvement. Since 2010, the average cost-of-living adjustment has been relatively mild, at 2.3%.
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