It is not likely that Social Security will get big raises any time soon. Due to the cost-of-living adjustment (COLA), Americans who get Social Security benefits have seen big raises over the last three years, adding a total of 18.8% to their payments.
This change is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures inflation. The COLA goes up when inflation does. But now that inflation seems to have leveled off, the picture for future rises is less bright.
From what the Federal Reserve has done recently, it looks like inflation is being controlled. Federal Funds rates were lowered by 50 basis points to a level of 4.75% to 5%. This was the first rate cut by the Federal Reserve in four years.
For the past two years, rates had been kept higher.
This drop in interest rates does not have a direct effect on the COLA for 2025, but it does show that the Federal Reserve thinks inflation is going down and will likely keep going down as it works toward its long-term goal of 2%.
It also shows a change in the economy and job market as a whole, which have both slowed down enough that the Federal Reserve is not as worried about the risks of dropping rates too quickly.
Predictions for the 2025 COLA
In order to figure out the 2025 COLA, the Social Security Administration uses the CPI-W numbers from the third quarter. This is a good time to make an estimate since the numbers for July and August are already out there.
After going up by 2.87% in July, the CPI-W went up by 2.35% in August. The COLA for 2025 would probably go up by about 2.6% if those two months were the only ones used to figure it out.
The September inflation report, on the other hand, is more likely to make this estimate lower than to raise it. First, looking at inflation from one year to the next shows that it is going down. The CPI-W went up by 0.23% from August to September 2023.
This is the fastest rate of growth since April. This means that month-over-month inflation is slowing down, which would mean that year-over-year inflation is also going down. Second, energy prices have been going down, even though they tend to change a lot.
Oil prices fell below $70 per barrel in September, the lowest they had been in over a year. Since the price of energy is now a lot less than it was a year ago, inflation is expected to slow down even more.
Because of this, the 2.6% COLA that is expected for 2025 is probably the highest it will go.
The 202 COLA estimates
Even less good news is coming for the 2026 COLA when we look even further into the future. The Federal Reserve is still determined to get inflation to the level it wants it to be, which is 2%.
The Personal Consumption Expenditures (PCE) index, which is the Fed’s favorite way to measure inflation, showed that it was still 2.5% in July.
The central bank also wants to keep the job market strong and stop prices from going up again. If inflation goes up faster than expected, the 2026 COLA would be higher than the 2025 change.
The Fed thinks that PCE inflation will drop to 2.3% by the end of 2024 and to 2.1% by the end of 2025, based on its Summary of Economic Projections, which is also known as the “dot plot.”
With these predictions coming true, the 2026 COLA is likely to be around 2.2%, which is even less than the 2025 change.
Even though these raises are small, there is good news for retirees. Even though the expected COLA in 2025 will be a lot less than the 8.7% raise in 2023, retirees will still benefit from lower interest rates and less inflation.
The COLA is a measure that looks backwards, after all. It is based on inflation that has already happened, which means it makes up for costs that seniors have already had to deal with, like food and energy prices going up.
It is good for retirees that these big price hikes do not happen as often when inflation is low.
Lower interest rates also have other benefits, like making it easier to borrow money or refinance loans like car or mortgage loans. For retirees who are still handling their budgets, having more financial freedom can be helpful.
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