Social Security retirees expect the smallest pay increase in 4 years in 2025

The U.S. Bureau of Labor Statistics recently released inflation data for August. The numbers were roughly in line with expectations and continue to suggest that retirees can expect a smaller increase in their Social Security benefits in 2025 than in recent years. At this rate, retirees could soon see the smallest benefit increase since 2021. This came after rising inflation led to some of the largest increases in Social Security benefits in decades. Let's take a look at the situation.

How COLA works

Each year, a cost-of-living adjustment (COLA) is applied to Social Security benefits. The goal is to ensure that the purchasing power of benefits keeps pace with inflation, although some argue that the current method of calculating the COLA has fallen short of that goal.

The Social Security Administration (SSA) calculates the COLA using data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks price changes in a basket of goods and services. Specifically, the SSA looks at the CPI-W in the third quarter of the year, which includes the months of July, August, and September, and compares it to the values ​​for those months in the previous year. For example, the 3.2% COLA for 2024 was calculated using the average quarterly CPI-W values ​​listed below.

Data source: Social Security Administration.

The Federal Reserve has been raising interest rates for the past two and a half years to curb the highest inflation in decades, which has fallen from a peak of 9.1% in June 2022 to 2.5% last month (based on the Consumer Price Index for all urban consumers).

Here's where the 2025 COLA calculation stands—the September CPI-W number, the final piece of the puzzle, is due next month.

Data source: Social Security Administration

Based on the CPI-W numbers for July and August, the COLA would be 2.6% next year, and the final reading is likely to be closer to that rather than last year's 3.2%.

The smallest COLA adjustment in four years

A 2% COLA may come as a surprise to many welfare recipients after they received payout increases of 5.9% in 2022, 8.7% in 2023 and 3.2% last year. But they must remember that 2022 was the largest increase in 12 years, while 2023 saw the highest COLA in more than four decades.

According to the Senior Citizens League, retirees have lost purchasing power over the years due to inflation and a flawed COLA calculation. A lower COLA may seem disappointing at first, but remember that the lower inflation behind that number also means retirees' cost of living is increasing more slowly.

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Social Security retirees will see the smallest pay raise in four years in 2025. Original article from The Motley Fool