For Immediate Release:
August 14, 2024
The Cost-of-Living Adjustment for 2025 Projected at 2.57%
Our model points to a substantially lower cost-of-living-adjustment (COLA) for next year after the implementation of the 3.2% COLA in 2024. “The 2025 COLA prediction is about 2.57%, down from 2.63% last month,” says Alex Moore, The Senior Citizens League’s (TSCL) statistician and managing partner at Blacksmith Professional Services. Third-quarter numbers are very important because that's what's compared to the prior year's quarter to get the COLA.
The rate of inflation, as measured by the Consumer Price Index used to calculate the Social Security COLA, fell to 2.9% for July, down from 3.0 percent in June. This comes after another quarter of relatively high federal reserve interest rates (5.33% as of July). The Federal Reserve Interest Rate is one of the government’s key tools to tackle inflation.
Federal Reserve interest rates are important for Social Security because they are valuable for predicting future COLAs. The metric is the interest rate at which depository institutions, such as consumer banks, hold trade balances at federal reserve banks overnight. The Federal Reserve tends to increase rates to dampen inflation and lower them to encourage greater economic activity.
Our research has found that the Federal Reserve interest rate is able to explain about 23% of the COLA’s variance. On average, for every 1 percentage point increase in the federal funds effective rate compared to the previous year, the following year’s COLA rises about .82 percentage points. In short, since both interest rates and COLAs tend to rise in reaction to higher-than-expected inflation, climbing interest rates can help predict the COLA.
The government’s failure to return inflation to pre-pandemic levels is a top concern for seniors. Despite new legislation and the use of tools like higher Federal Reserve interest rates, 71% of the 2,016 seniors surveyed for the TSCL 2024 Retirement Survey in July said that persistent high prices from inflation forcing them to deplete their savings is among their top retirement concerns. More than three-quarters, 78%, said their monthly budget for essentials like housing, food, and medicine was higher than last year. More than half, 63%, worry that their retirement income will not be enough to cover the cost of essentials.
Seniors want Congress to act to ensure their Social Security benefits keep up with inflation. Using existing tools, like the Federal Reserve interest rate, is not enough. In the survey, less than 1% of seniors said that Congress shouldn’t do anything to boost Social Security benefits to address inflation-driven shortfalls. A large majority—75%—said they want Congress to pass legislation that would base COLAs on the CPI for the Elderly (CPI-E), a price index that’s specific to seniors, rather than the CPI for Urban Wage Earners (CPI-W), which is better suited to the general population.
Contact: TSCLPress@tsclhq.org
