Here's how Social Security's COLA projections for 2025 compare to the past 50 years and why retirees may not be over the moon

There are some words that consumers don't like to hear, and “inflation” is usually one of them. You only have to walk through a supermarket or retail store to realize that a dollar can't buy you as much these days as it could a few years ago.

From an economic perspective, inflation is generally considered better than deflation, but that doesn't lessen its impact on the average person. This is especially true for people on fixed incomes, like many welfare recipients. Fortunately, welfare has a cost-of-living adjustment (COLA) to help offset some of the effects of inflation.

The official Social Security COLA numbers won't be released until October, but it's never too early to start thinking about a possible range they might fall in. Unfortunately, the current COLA estimates aren't likely to have retirees jumping for joy compared to the past five decades. Let's look at why.

How Social Security determines the amount of the COLA

Social Security sets the COLA based on one measure: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is a monthly measure that takes into account everyday household items, transportation, food and grocery costs, and other relevant expenses. Below are examples of specific items that are taken into account:

• Household items: Toilet paper, cleaning products and detergents.
• transport: petrol, public transport fares and vehicle maintenance.
• Food and grocery shopping: vegetables, bread, milk.

The CPI-W is based on spending by families living in urban areas who earn more than 50% of their income from office or hourly wage jobs, which is about 32% of the U.S. population, according to the U.S. Department of Labor.

Social Security averages the CPI-W data for the months of the third quarter (July, August, and September) and compares it to the previous year's data to determine the COLA for the coming year. For example, if the CPI-W average is 200 for one year and 205 the following year, the COLA would be set at 2.5% because the 5-point change is 2.5% of the baseline of 200.

If the CPI-W data for one year is lower than the previous year, Social Security will not reduce monthly benefits; they will remain the same. For example, if the CPI-W average for one year is 205 and the following year is 200, the COLA will be set at 0% instead of being reduced by 2.5%.

COLA projections for Social Security for 2025

The Senior Citizens League (TSCL) is a senior advocacy group known for its COLA projections. The group's predictions are far from foolproof and have proven off from time to time, but they can give retirees a rough idea of ​​what to expect and help them get started on their financial planning.

In its latest forecast on August 14, TSCL projects a 2025 COLA of 2.57%, down from the 2.63% forecast in July. Since Social Security COLAs only go one decimal place, we meet in the middle at 2.6% in both cases.

Comparison of COLA 2025 with the last 50 years

A 2.6% COLA would be the lowest since 2021. The good news is that it means inflation has cooled over the past few years. The bad news is that it would be the lowest COLA since 2021. It's a bit of a bittersweet trade-off. A 2.6% increase would also be less than the 3.4% average since COLAs were automatically implemented starting in 1975. To give you a little more perspective, here are the five highest COLAs since 1975.

Source: Social Security Administration.

On the other hand, here are the five smallest COLAs since 1975.

Source: Social Security Administration.

A 2.6% COLA wouldn't be the worst thing in the world, but it's fair to say that many welfare recipients would welcome a higher amount as well. In any case, it's better to prepare for a more modest increase now than to be surprised when the official numbers are released in October.