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Each year, Social Security recipients eagerly anticipate the Cost-of-Living Adjustment (COLA) that helps keep their benefits in line with inflation.
However, unlike what most people believe, the COLA is not just used for Social Security benefits—it applies to a range of government benefits.
But despite its role in helping beneficiaries cope with rising costs, the COLA doesn’t always adequately address the financial strain many face, especially in times of high inflation.
What is the COLA and How Is It Calculated?
The COLA is a percentage increase applied to Social Security benefits (and other government assistance) to help offset inflation. It’s calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the price changes of eight categories of life expenses, including housing, medical expenses, food, and transportation. The CPI-W tracks the cost of these goods and services during the third quarter of the year—July, August, and September—and compares it to the same months in the previous year. The resulting percentage is then used to adjust benefits.
For 2025, the COLA increase for Social Security benefits is set at 2.5 percent, which was announced in October. While this might seem like a modest increase, many beneficiaries are concerned that it won’t be enough to keep up with ongoing inflation, especially considering the current economic landscape.
Challenges with the 2025 COLA Increase
There are several issues with the COLA system that many beneficiaries have pointed out over the years, and these concerns remain prominent as we approach 2025.
1. Inflation Can Outpace COLA Increases
One of the primary issues with the COLA is that inflation can easily outpace the adjustments, effectively rendering them useless. This was evident in 2024, when the 3.2 percent COLA increase was quickly overtaken by rising inflation in the first half of the year. While inflation has cooled somewhat due to actions taken by the Federal Reserve and government policy, the problem is expected to continue into 2025. Key expenses such as groceries, housing, and transportation costs have continued to climb, which could lead to a situation where the 2.5 percent COLA increase is not enough to make up for the rising cost of living.
2. The CPI-W Doesn’t Reflect Seniors’ True Expenses
Social Security Beneficiaries to See Significant COLA Increase in 2025
The second problem with the COLA is that the CPI-W—the index used to calculate COLA—is more representative of the spending habits of young urban professionals, rather than seniors, disabled individuals, or disadvantaged populations. These groups tend to spend a larger portion of their income on housing and medical expenses, two categories that have seen the most significant price increases in recent years.
An alternative index, the Consumer Price Index for the Elderly (CPI-E), might be better suited for calculating COLA for seniors. The CPI-E takes into account the higher weight placed on housing and medical costs, which are central to many elderly individuals’ spending. In fact, the CPI-E often results in a higher COLA than the CPI-W, suggesting that if it were used for calculating benefits, seniors would receive a more appropriate increase.
3. Seniors on Fixed Income Struggle with Rising Costs
Another significant problem is that Social Security recipients are on a fixed income, and the COLA increases typically don’t come in time to offset rising expenses. The adjustments are made after the costs have already gone up, leaving many retirees to dip into their savings or rely on other government benefits to make ends meet. The problem is compounded by the fact that Social Security benefits are not designed to build savings—they are intended for basic living expenses. This makes it difficult for many seniors to maintain an acceptable standard of living, especially those living paycheck to paycheck. While those with significant savings or investments may weather the storm, low-income seniors may struggle to keep up with even modest increases in the cost of living.
Other Benefits Tied to the COLA
In addition to Social Security, there are other government programs that rely on the COLA to adjust benefit levels. One such program is the Supplemental Nutrition Assistance Program (SNAP), which is designed to help low-income individuals and families buy food. Many Social Security beneficiaries qualify for SNAP, and the benefit levels are adjusted each year based on the COLA.
In 2025, the increase in SNAP benefits will align with the 2.5 percent COLA. For eligible individuals, this means that a single person could receive up to $292 in SNAP benefits, while a two-person household could qualify for $536 in benefits. However, despite these adjustments, many eligible seniors still do not take full advantage of SNAP. According to the National Council on Aging, about three-fifths of eligible seniors are not using the benefits they qualify for. Advocates encourage seniors to apply for these benefits, as they can help reduce the strain of rising food costs.
Conclusion
The 2025 COLA increase of 2.5 percent for Social Security benefits may seem like a helpful adjustment, but it falls short of addressing the real challenges that seniors and other beneficiaries face in the face of rising inflation. The index used to calculate the COLA, the CPI-W, doesn’t adequately reflect the spending habits of seniors, who typically face higher costs for housing and medical care. As a result, many seniors find themselves struggling to maintain their standard of living despite these annual increases.
While other government programs, like SNAP, also adjust according to the COLA, they are often not enough to bridge the gap for low-income seniors. For those who rely on Social Security as their primary source of income, the 2.5 percent increase in 2025 will likely feel insufficient to cover the rising costs of everyday expenses.
For many retirees, the ongoing challenge will be how to stretch their fixed income as inflation continues to impact their purchasing power.
As inflation and living costs continue to climb, it’s essential for lawmakers to consider alternative measures, such as using the CPI-E for calculating COLA, to better meet the needs of the senior population.
