The recent announcement regarding changes to Social Security benefits for 2025 has sparked significant discussion, particularly around the implications of the new cost-of-living adjustment (COLA) and the legislative developments surrounding Social Security regulations.
What Is A Cost-of-Living Adjustment (COLA)?
A cost-of-living adjustment (COLA) is an increase made to Social Security benefits and Supplemental Security Income (SSI) to counteract the effects of inflation and rising prices in the economy.
COLAs are typically equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a specific period. The Consumer Price Index (CPI) represents the average prices of a basket of goods and is used to measure inflation.
The COLA was 3.2% for 2024. Someone who received $10,000 in Social Security benefits in 2023 would see their 2024 annual benefit increase to $10,320. The COLA for 2025 is 2.5%, meaning that someone who received $10,000 in 2024 benefits would receive $10,250 the following year.
Understanding The Consumer Price Index For Urban Wage Earners And Clerical Workers (Cpi-W)
The Consumer Price Index is a measure of the change over time that wage earners and clerical workers pay for a “basket of goods” of common expenses. These cover more than 200 common consumer products, which are arranged into eight groups
The CPI-W is a way of calculating the CPI that uses this same data but includes information from only certain groups. It focuses on the costs experienced by households with at least 50% of the household income coming from clerical or wage-paying jobs, where at least one of the household’s earners was employed for at least 37 weeks of the year.
U.S. Bureau of Labor Statistics. “News Release-Consumer Price Index,” Page 5.
Different versions of the CPI-W have been released. These include a national average CPI-W (the U.S. City Average), population size classes, and individual metropolitan areas and geographic regions.
The CPI-W is used as a benchmark for many benefit plans to reflect changes in the cost of benefits, such as Social Security payments. It can also be used to calculate future contract obligations.
- Food and beverage
- Housing
- Apparel
- Transportation
- Medical care
- Recreation
- Education and communication
- Other goods and services
The Bureau of Labor Statistics (BLS) calculates the average cost that consumers pay for these goods annually and then uses those averages to track changes from year to year.
These changes are expressed as a percentage that shows the change in the day-to-day cost of living. A steep increase usually indicates a period of inflation; a steep decrease usually indicates a period of deflation.
