The Social Security Cost-of-Living Adjustment (COLA) Calculation Hurts Seniors. 1 Change Could Bring Thousands More in Benefits.

We're still a few months away from the 2025 Social Security cost-of-living adjustment (COLA) announcement, but the latest projections put it at a disappointing 2.6%. That would add about $50 to the $1,931 average Social Security benefit as of March 2024.

It might not be enough, though. Many seniors reported their benefits rising by more than $185 in 2023, according to The Senior Citizens League (TSCL), though the COLA only increased average benefits by $59 per month for 2024.

A big reason for this mismatch has to do with how the Social Security Administration calculates COLAs in the first place. For years, people have been requesting a change that would net seniors thousands more over their lifetime. President Biden has even included it in his four-point plan for Social Security, but it faces a long road to approval.

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The CPI-W vs. the CPI-E

Since 1975, the government has based Social Security cost-of-living adjustments (COLAs) on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is a subset of the Consumer Price Index for All Urban Consumers (CPI-U).

Both are measures of how much consumers have spent on items in more than 200 categories broken down into eight major groups -- food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.

The CPI-U is the broadest index, covering the spending habits of all people living in urban or metropolitan areas. But it has some glaring omissions. It doesn't cover people living in rural areas, people in farm households, members of the Armed Forces, or people in institutions such as prisons or mental hospitals.

The CPI-W is an even narrower index that covers an estimated 30% of the U.S. population. To be included in this index, households must meet two additional criteria:

1. More than one-half of the household's income must come from clerical or wage occupations.
2. At least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months.

This, by definition, rules out households where all members are retired. These individuals are actually tracked by a separate index known as the Consumer Price Index for the Elderly (CPI-E).

Many argue -- with good reason -- that the government should use the CPI-E to calculate COLAs rather than the CPI-W because the CPI-E better reflects senior spending habits. It could also lead to larger COLAs.

TSCL found that the CPI-E was higher than the CPI-W in seven of the last 10 years. Had the government used the CPI-E to calculate COLAs instead, the average senior would've received $2,689.20 more over the last decade, as outlined in the table below:

Source: The Senior Citizens League.

Doing this might seem like an obvious solution to Social Security's diminishing buying power, which TSCL estimates is down 36% from 2000. But the odds of it happening anytime soon aren't great, considering that it could exacerbate another problem.

Will Social Security ever make the switch?

An eventual change to the CPI-E is certainly a possibility, especially with many high-profile politicians, including President Biden, advocating for it. However, one possible reason for the lack of movement on the issue is Social Security's long-term funding crisis.

The latest projections estimate that Social Security's trust funds will be depleted in 2035. After this point, it will only be able to pay out 83% of scheduled benefits going forward unless the government takes steps to increase its funding. So far, it's yet to come up with a game plan to solve this.

Switching to the CPI-E now could benefit seniors in the short term by boosting COLAs and monthly checks. But it could also accelerate the timeline to Social Security insolvency. This could lead to significant benefit cuts that could hurt seniors even more.

But there are a few silver linings in all of this. First, Social Security, even in the worst-case scenario, isn't going away anytime soon. Seniors will continue to get COLAs in most years as determined by the CPI-W. Second, converting to the CPI-E remains a possibility, though only time will tell if or when this change could occur.

In the near term, seniors may have to consider alternative sources of retirement income to supplement their Social Security benefits if they don't believe their COLAs are helping enough. Workers hoping to maximize their benefits should time their Social Security claim carefully to ensure they get their greatest possible lifetime benefit.