In just a few months, retirees will be eagerly waiting for a big financial update: the announcement of the 2025 Social Security cost-of-living adjustment (COLA). This news, expected in mid-October, will show how much their benefits will go up next year. Right now, projections suggest a COLA increase of about 2.6% to 2.7%, but there’s a good chance the final amount could be a bit higher.
How COLA Is Determined
The Social Security Cost-of-Living Adjustment (COLA) is designed to protect benefits from inflation, ensuring retirees can maintain their purchasing power over time. To figure out this adjustment, the Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index tracks price changes for people living in urban areas where most income comes from clerical or wage-based jobs.
Here’s how it works: the SSA compares the average CPI-W for the third quarter (Q3) of the current year with the same period from the previous year. If there’s an increase, that percentage becomes the COLA for the following year, rounded to the nearest tenth of a percent.
Why a Higher COLA Is Possible
Although current forecasts suggest a 2.6% to 2.7% increase in the Cost of Living Adjustment (COLA), some believe it might be higher. This is because, historically, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) often rises in the third quarter of the year. Since 1974, the CPI-W has typically been higher in the third quarter compared to the second quarter, with only three exceptions. If inflation goes up this third quarter, the COLA could exceed current predictions.
One key reason for this potential increase is the possible rise in oil prices. Even though oil prices have recently fallen due to recession fears, some experts think these worries are overblown. The recent uptick in unemployment wasn’t due to layoffs but because more people are looking for jobs again. Plus, China’s growing need for oil and gas, along with rising tensions in the Middle East, could push oil prices higher and, in turn, drive up inflation.
What to Expect
Considering the current situation, it looks like the 2025 Cost-of-Living Adjustment (COLA) might be around 2.8% or 2.9%. This isn’t a huge leap from what we’re currently expecting, but it would still mean a bit more in Social Security benefits.
Keep in mind, though, that these are just estimates. The economy can change quickly, so we won’t have the final COLA number until October. Regardless of the final figure, retirees will still have to deal with ongoing inflation challenges.
FAQs
When will the 2025 COLA be announced?
The Social Security Administration (SSA) will reveal it in mid-October 2024.
What are the current COLA projections for 2025?
Right now, estimates predict an increase between 2.6% and 2.7%.
What could cause the COLA to be higher?
If inflation rises in the third quarter, possibly due to higher oil prices, the COLA might go up more than expected.
How is the COLA determined?
It’s calculated based on the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of the year.