This Flaw In The Social Security Benefit Calculation Will Cost Retirees $120 On Average In 2025

In just a few weeks, retirees will get their first Social Security benefits with the 2025 cost-of-living adjustment (COLA) included. This will raise the average check to $1,976 per month. It's less than what many were hoping for, especially after three years of above-average COLAs, including a whopping 8.7% increase for 2023.

Many argue the 2.5% bump will be insufficient to cover the rising costs seniors will face in 2025, and an odd quirk of the Social Security benefit calculation may be to blame. It's estimated to cost the average retiree $120 next year, and some could miss out on even more.

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How the government calculates COLAs

The Social Security Administration (SSA) issues COLAs in most years to help Social Security benefits keep up with inflation. The SSA measures that inflation using the changes in the third-quarter averages of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from one year to the next.

Essentially, the government looks at the CPI-W numbers for July, August, and September of the current year, adds them up, and divides them by three to get the third-quarter average. Then, it compares this to the average of the same months in the previous year. The difference is the COLA. The 2024 average was 2.5% higher than the 2023 average, so retirees get a 2.5% COLA for 2025.

It seems logical, until you learn that the CPI-W focuses on the spending habits of households in urban areas where at least one member was employed for at least 37 weeks out of the year, or where at least 50% of household income comes from wages associated with an eligible occupation. That means retirees without jobs aren't included.

They're actually tracked by a separate index known as the Consumer Price Index for the Elderly (CPI-E). This focuses specifically on the spending habits of those 62 and older, which are often different from their younger counterparts. For example, older adults often have to spend more on medical care than younger adults, but they may spend less in other areas.

How the COLA calculation shortchanges retirees

Many argue the government should use the CPI-E to calculate Social Security COLAs instead of the CPI-W because the CPI-E better reflects retiree spending habits. Doing this would also result in larger COLAs in most years.

The Senior Citizens League (TSCL), a nonpartisan senior group, found that using the CPI-E instead of the CPI-W would've resulted in higher COLAs in seven of the 10 years between 2014 and 2024. Had this change been in effect, retirees would've taken home an additional $2,689 over that decade.

Retirees will run into the same issue in 2025. Had the government used the CPI-E to determine the COLA, seniors would be getting a 3% boost to their checks next year instead of 2.5%. That would've increased the average monthly benefit by another $10.

It might not seem like much, but that would give the average retiree an extra $120 to spend in 2025 -- nearly enough to pay the Medicare Part B premium increase that will likely come out of your Social Security checks automatically if you're enrolled in both.

Will the COLA calculation ever change?

There aren't currently any plans to alter the COLA calculation so it uses the CPI-E instead of the CPI-W, but that doesn't mean it'll never happen. Some members of Congress support this proposal, but the idea hasn't managed to gain traction yet. If it happens, it's likely to occur as part of broader reforms intended to fix Social Security's impending shortfall.

In the meantime, retirees will have to supplement their Social Security checks with personal savings or income from a job to cover what their benefits don't. You could also check to see if you're eligible for other government benefits, like Supplemental Security Income (SSI), to help make ends meet.

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