Retirement Planning

Understanding the 2025 Social Security COLA Increase and Potential Changes

Understanding the 2025 Social Security COLA Increase and Potential Changes

Social Security recipients are set to receive a positive financial adjustment soon. The Social Security Administration (SSA) announced on October 10, 2024, that benefits for over 72.5 million individuals will go up by 2.5% in 2025. Since 1975, there has been no change in how the annual cost-of-living adjustment (COLA) is calculated. However, numerous political leaders, including Democratic presidential nominee Kamala Harris, have sought to revise this calculation method.

Here's an insight into how the 2025 Social Security COLA might look if Harris's proposed changes were implemented. Before her vice presidency, Harris, as a U.S. senator representing California, expressed support for changes in the COLA calculation. In 2019, she co-sponsored the Social Security Expansion Act introduced by Senator Bernie Sanders. This proposed legislation aimed at several Social Security reforms, including altering the COLA's calculation. Traditionally, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been used for almost five decades in determining the benefits adjustment.

Harris endorsed the idea of replacing the CPI-W with the Consumer Price Index for Elderly Consumers (CPI-E), more recently referred to as the R-CPI-E. This swap in inflation metrics stems from criticisms that the CPI-W doesn't accurately reflect the actual costs faced by older Americans. The R-CPI-E aims to address this discrepancy and provide a more representative inflation measure for the elderly population. When Harris joined Joe Biden's 2020 presidential campaign as his running mate, she supported platform policies including the shift to the CPI-E for calculating Social Security COLAs. Shifting to this metric could potentially result in more substantial financial benefits for retirees.

The Senior Citizens League, a nonprofit that advocates for senior citizens, has been lobbying for a legislative shift to the CPI-E methodology. The Congressional Research Service (CRS), earlier in the year, indicated that adopting the R-CPI-E is likely to result in higher COLAs and consequently larger Social Security benefits. CRS research suggests that historically, since 1986, the R-CPI-E would have led to equivalent or increased COLAs except for six years. With a switch to R-CPI-E, the 2025 Social Security COLA would rise to 3%, rather than the scheduled 2.5%. For the average retired worker, whose monthly benefit was $1,920.48 as of August 2024, a 2.5% increase translates to an additional $48.01 monthly.

Should the COLA rise to 3%, the increase would instead be $57.61. While this $9.60 seems modest monthly, it accrues to an extra $115 annually, making a significant difference for numerous retirees. Looking ahead, if Kamala Harris achieves the presidency, whether she will push for the CPI-E remains uncertain. While she has previously shown support as both a senator and vice president, the adoption of CPI-E was not highlighted in her presidential campaign proposals. A potential push might depend on the Democrats' control over both the House of Representatives and the Senate.

Nonetheless, even without this scenario, the COLA calculation method might undergo future revisions. With the impending depletion of the Social Security trust funds projected by 2035, substantial reforms will be necessary to avert drastic benefit cuts. Such political negotiations addressing future solvency issues may consider modifications that enhance benefits, with the CPI-E potentially taking precedence in reform discussions.