Since 1975, Social Safety beneficiaries have obtained annual cost-of-living changes (COLAs) tied to a subset of the Client Worth Index often known as the CPI-W, which tracks the value of products and providers throughout the financial system.
Right here is the way it works: The CPI-W from the third quarter of the present yr (the typical studying between July and September) is split by the CPI-W from the third quarter of the prior yr. The p.c improve turns into the COLA within the subsequent yr.
Importantly, COLAs are designed to guard the shopping for energy of Social Safety by making certain advantages improve on the identical tempo as inflation. As an example, CPI-W inflation elevated 2.5% within the third quarter final yr, so Social Safety funds elevated 2.5% this yr. That’s the smallest COLA since 2021.
Sadly, Labor Division information printed final week confirmed CPI-W inflation has reaccelerated within the final three months. That pattern is unhealthy information for retired employees on Social Safety. Here is why.
The cost-of-living adjustment (COLA) utilized to Social Safety funds in any given yr relies on CPI-W inflation from the third quarter of the earlier yr. In that sense, COLAs are a reimbursement mechanism to compensate retirees for the shopping for energy advantages misplaced within the earlier yr.
Meaning retired employees are all the time behind the curve to some extent, however the issue is most extreme when inflation is rising. Put in another way, whereas any inflation reduces the shopping for energy of advantages, Social Safety loses shopping for energy most rapidly when inflation is trending larger. That’s taking place right this moment.
Particularly, after falling to 2.2% in September 2024, CPI-W inflation reaccelerated to 2.4%, 2.6%, and a pair of.8% in October, November, and December, respectively. Meaning inflation has trended larger in each month for the reason that COLA was calculated. One consequence is that the two.5% COLA in 2025 underestimated full-year CPI-W inflation of two.9% in 2024.
Meaning the spending energy of Social Safety fell by four-tenths of a share level, which is one other approach of claiming the 2025 COLA was not massive sufficient. The shortfall would have a small impression if it had been a one-time occasion, however the identical factor occurred with the earlier COLA. Particularly, CPI-W inflation elevated 3.8% in 2023, whereas advantages solely elevated 3.2% in 2024.
So, the cumulative COLA within the final two years ought to have been 6.8%, however advantages solely elevated 5.8%. For context, the typical retired employee obtained $1,905 monthly in December 2023. The month-to-month payout would now be $2,034, had advantages risen 6.8%, however that retiree will get simply $2,015 monthly right this moment as a result of advantages solely elevated 5.8%. The discrepancy totals $228 for the total yr.
