Social Security Beneficiaries - It’s Time For a Raise!

It’s that time of year again when retirees are alerted to whether they’re getting a boost in compensation. That right, it’s “cost of living adjustment” (COLA) time for Social Security and Supplemental Security Income payments. Each year the U.S. government assesses the level of inflation and makes a corresponding adjustment to monthly payments for the upcoming year. The intent is for this benefit to not lose ground to inflation such that the “real” (i.e., inflation-adjusted) benefits are the same. The increase in payments from 2024 to 2025 will be 2.5%. 

The level of COLA adjustments has substantial economic effects. At this point, with a growing number of “baby boomers” receiving benefits, there are now greater than 68 million Americans receiving benefits totaling $1.5 trillion per year. As we all know by now, inflation has been rampant in recent years such that adjustments have been abnormally high (see table below). 

So, as we look at the last five years, one’s payment in 2025 will be over 22% higher than it was in 2019. While that may seem like a lot, whether one feels better or worse off largely depends on spending habits and other sources of income. For example, the Social Security Administration (“SSA”) reports that 30% of the average retiree’s income comes from Social Security benefits with 70% coming from other sources. 

It’s notable that the benefit adjustment is based on inflation calculations that incorporate the entire U.S. population. A federal law (the Social Security Act) specifies a formula for determining each COLA. According to the formula, COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). So, it may not be perfectly appropriate for retirees who tend to spend money on a different basket of goods and services than the average citizen. In our observation, retirees tend to spend more on services (e.g., medical care, senior housing, travel, etc.) which have seen inflation rates that exceed the levels in the table above.

One can’t finish a commentary about Social Security without mentioning the growing strain on the current system. According to the SSA, the number of Americans 65 and older is projected to increase from about 61 million in 2023 to about 77 million by 2035. Presently, benefits are paid from two Trust funds managed by the Department of Treasury. These asset reserves were intended to perpetually cover the cost of the program, but current estimates indicate that the reserves will be depleted by 2035. While this sounds alarming, most experts predict that the depletion of the Trust assets will not end Social Security but, rather, will simply put additional pressure on the Federal budget deficit and force tough conversations about spending. That conversation is for another day but clearly the U.S. Government has some difficult spending decisions coming up in the not-too-distant future.