October is a month of transitions. From Breast Cancer Awareness Month to the hues of fall foliage, this month ushers in change on multiple fronts. However, for retirees, one event stands out among the rest – the anticipation of the annual cost-of-living adjustment (COLA) to Social Security benefits.
Upon reflection, the 3.2% increase in this year’s Social Security COLA may seem generous. But brace yourself as winds of change are swirling in the distance, promising the potential for an even grander adjustment.
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Understanding the Current COLA Calculation Process
To comprehend the potential impact of the proposed change, it’s crucial to delve into how your annual Social Security COLA is presently calculated.
COLAs are intricately tied to inflation. A rise in the prices of goods and services you regularly purchase triggers an adjustment in your Social Security benefits. Conversely, if prices stagnate, you receive no adjustment – a scenario not as rare as one might assume. In fact, there have been three years since 2009 when Social Security benefits remained unaltered.
The Social Security Administration (SSA) steers clear of the commonly cited Consumer Price Index (CPI) and instead relies on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). To ascertain your annual Social Security adjustment, the SSA evaluates the percentage increase of the average CPI-W for the third quarter of the current year compared to the previous year. This percentage is then rounded off to the nearest tenth.
Proposed Legislative Change on the Horizon
U.S. Rep. Ruben Gallego and Sen. Bob Casey are advocating for a revamp in the current COLA calculation system. Their proposed legislation, if implemented, would swap out the CPI-W with the Consumer Price Index for the Elderly (CPI-E) under specific conditions.
The rationale behind this change lies in the discrepancy between the CPI-W, which reflects price adjustments for workers, and the demographic it is meant to serve – predominantly elderly Social Security recipients. The CPI-E places a heavier emphasis on healthcare costs, an area where older Americans often face heightened expenses.
Analysis by The Senior Citizens League (TSCL) of the past decade reveals instances where utilizing the CPI-E would have resulted in higher COLAs in the majority of years.
| Year | COLA using CPI-W | COLA using CPI-E |
|---|---|---|
| 2024 | 3.2% | 4% |
| 2023 | 8.7% | 8% |
| 2022 | 5.9% | 4.8% |
| 2021 | 1.3% | 1.4% |
| 2020 | 1.6% | 1.9% |
| 2019 | 2.8% | 2.6% |
| 2018 | 2% | 2.1% |
| 2017 | 0.3% | 1.5% |
| 2016 | 0% | 0.6% |
| 2015 | 1.7% | 2% |
Data source: The Senior Citizens League. Table by author.
A 4% COLA adjustment would have translated to an additional $61 in the average monthly benefit for Social Security recipients this year. With the proposed legislative changes, the trajectory seems promising, ensuring that the adjustment never plummets below the current standard and often soars even higher.
Potential for Elevated COLAs in the Future
While the prospect of enhanced Social Security COLAs is tantalizing, it’s essential to maintain a realistic outlook. Changes to Social Security during a presidential election year are typically rare. Talks may buzz, but tangible actions are seldom witnessed.
Furthermore, any alteration to the COLA computation method is likely to hike Social Security costs, a significant consideration with the program’s trust funds on a collision course with depletion by 2033. A broader reform encompassing solvency concerns may render the proposed changes more amenable.
The integration of the CPI-E into the COLA calculation process appears prudent. Perhaps, in a future October, the annual windfall may exceed expectations. Nonetheless, prudence dictates a vigilant eye on expenditures, as the COLA for 2025 might not match inflated hopes.
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