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Retirees are still feeling the effects of higher prices.
However, there is one buffer against the effects of inflation: the Adjustment of the social security cost of livingor COLA, — may be lower next year.
According to the latest estimate from Mary Johnson, an independent policy analyst on Social Security and Medicare, Social Security's COLA could reach 3% by 2025 as inflation declines.
That estimate is lower than the 3.2% increase in benefits which saw more than 66 million beneficiaries as of January. It is also significantly lower than the record 8.7% COLA beneficiaries received in 2023 and the 5.9% COLA that went into effect in 2022 in response to record-high inflation.
How the Social Security COLA is calculated
The annual adjustments are based on a subset of the consumer price index, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
Every year the Social Security Administration compares the CPI-W data from the third quarter of that year to the third quarter of the previous year. If there is a percentage increase from one year to the next, that determines the COLA. However, if there is no increase, there is no COLA.
Because it is still very early in the year, the Social Security COLA estimate may still change.
Why Early COLA Estimates for 2025 Are Lower
Looking at the most recent CPI-W data, it becomes clear why the increase is lower than the record-high increases retirees have seen recently.
Prices for certain categories saw double-digit percentage drops compared to two years ago in May. Heating oil fell 35.3%; airfares fell 19.4%; and gasoline fell 17.7%.
'Real senior inflation underestimated'
According to Boston College's Center for Retirement Research, many retirees dealt with inflation by making adjustments, such as reducing their savings or tapping into existing assets.
“They are taking a huge hit to their future wealth,” said Laura Quinby, senior economist at the Center for Retirement Research. previously told CNBC.com.
According to Quinby, the effects of Social Security's cost-of-living adjustments vary from person to person, depending on their personal spending and where they live.
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Some experts argue that the CPI-W is not a perfect measure of retiree spending. For example, while the CPI-W assumes that seniors spend about 66 percent of their income on housing, food and medical expenses, in reality, about 75 percent of their income is spent on those costs, Johnson said.
“This discrepancy suggests that my COLA estimate, which is based on the CPI-W, understates real senior inflation by more than 10 percent,” Johnson said.
Nevertheless, the latest CPI-W shows where inflation is declining and rising, which could ultimately affect next year's COLA.
