Here's the biggest problem with Social Security's 2025 COLA

There is perhaps no more important announcement related to Social Security than the Annual Cost of Living Adjustment (COLA). Many seniors rely on Social Security for a large portion of their retirement income. Because of this, they rely heavily on COLAs to cover their living expenses from one year to the next.

On October 10, the Social Security Administration announced a series of major changes to the program that will take effect in 2025. This included news of a 2.5% COLA.

Unfortunately, many seniors are affected by this announcement, as a 2.5% increase is particularly stingy. Making matters worse, the 2.5% increase in 2025 pales in comparison to the COLAs received in recent years.

At the start of 2024, Social Security benefits increased by 3.2%. The year before, seniors enjoyed a whopping 8.7% COLA. In this context, a 2.5% increase seems even less optimal.

But the fact that the Social Security COLA is minimal in 2025 isn't actually the biggest problem. With COLA 2025, there is an even bigger problem that the Legislature really needs to address – and quickly.

Technically, a 2.5% COLA for Social Security isn't bad, considering it's largely in line with the average increase over the last decade. Rather, the problem is that Social Security recipients typically lose purchasing power year after year, regardless of how high their COLAs actually are.

The nonpartisan Senior Citizens League reported last year that Social Security recipients have lost 36% of their purchasing power since 2000 because of inadequate COLAs. And the weak increase in 2025 only worsens the situation.

The root of the problem lies in the formula used to calculate Social Security COLAs. These increases are based on changes in the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W) in the third quarter. However, the CPI-W is not an accurate measure of the costs that seniors tend to face in Social Security and the extent to which they tend to rise.

The CPI-W records the expenses of wage earners. Many Social Security recipients are retired and therefore do not earn wages (even though they do). Is allowed to work and receive social security at the same time).

To give just one example, seniors who receive Social Security typically spend a large portion of their income on health care. Wage earners may also spend a fair portion of their income on health care, although not necessarily to the same extent as Social Security recipients.

The CPI-W also tracks spending by people in urban areas. It is not a given that social security recipients live in the same areas.

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