Here's why the Social Security COLA is smaller for 2025 Some argue the way the COLA is measured should change
Social Security beneficiaries will see the lowest cost-of-living adjustment in 2025 since the pandemic
The Social Security Administration on Thursday announced that the cost-of-living adjustment will be 2.5% in 2025.
When that increase goes into effect, it will be the lowest adjustment to benefits that beneficiaries have seen since 2021, when the cost-of-living adjustment, or COLA, was 1.3%.
The Social Security cost-of-living adjustment was put in place to help benefits keep pace with inflation.
The COLA is calculated based a subset of the consumer price index known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The percentage increase in the CPI-W from the third quarter of last year to the third quarter of this year determines the cost-of-living adjustment.
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As government inflation data shows the pace of inflation has subsided, the size of the annual increase to benefits has come down.
"It's better when the number is small, because it means that the inflation experienced by seniors is not as bad as it might have been," said Charles Blahous, senior research strategist at George Mason University's Mercatus Center.
The 2025 adjustment is not the lowest the Social Security COLA has been. In 2016, 2011 and 2010, it was zero and beneficiaries saw no increases at all in those years.
Still, for retirees, people with disabilities and other beneficiaries, the lower adjustment for 2025 comes as they continue to grapple with high costs.
"Before the inflation got so high, we just took lower costs for granted," said Mary Johnson, an independent Social Security and Medicare policy analyst who is also a Social Security beneficiary. "It really has significantly changed how we have to manage since then."
Having a lower cost-of-living adjustment when prices are still high — and when inflation was higher in the earlier part of this year — is going to be a "real sticker shock for some people," said Shannon Benton, executive director at The Senior Citizens League.
Experts debate best COLA measurement
There is a debate among advocates and lawmakers as to whether a different measurement should be used for the cost-of-living adjustment. Such a change would have to be approved by Congress.
The current annual increase that's automatic and compounds from year to year is very valuable, said Jenn Jones, vice president for government affairs at AARP.
"That makes Social Security really unique and really special and important for older Americans," Jones said.
The AARP supports a COLA measurement that is accurate and reflective of what older Americans are spending, she said. Another experimental index — the Consumer Price Index for the Elderly, or CPI-E — may better reflect seniors' spending patterns, the nonpartisan organization representing people 50 and over argues.
"Whenever Congress chooses to act in a bipartisan way to finally shore up Social Security's financial future, we do believe that CPI-E should be a part of that discussion," Jones said.
After the announcement of the COLA for 2025 on Thursday, other senior advocacy groups also spoke out in favor of switching to the CPI-E, including the National Committee to Preserve Social Security and Medicare and Social Security Works.
"The traditional formula (CPI-W) does not fully account for the impact of inflation on the goods and services seniors spend the most money on — especially health care and housing," Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, said in a statement.
To be sure, not everyone agrees the CPI-E would be the best measure. Because one-third of Social Security beneficiaries are not elderly, it would not make sense to use an index focused on that population, Blahous said. Instead, he said the chained CPI, which measures changes in consumer spending patterns, would be a better fit.
Washington lawmakers have proposed bills that would change the way Social Security's annual cost-of-living adjustment is measured, prompting Social Security Works to declare "Social Security's COLA is on the ballot" this November in a statement released on Thursday.
This story originally appeared on: CNBC - Author:Lorie Konish
