Retirees need to wait around two months to receive significant financial updates affecting them.
I am talking about the Social Security announcement for the year 2025 that was made in mid-October. An increase in wages or benefits that is meant to keep up with the rising cost of goods and services. At the moment, it is expected that Social Security benefits will rise by 2.6% to 2.7%. Nonetheless, I anticipate that the Social Security Cost of Living Adjustment (COLA) for 2025 will surpass the current estimates. Here is my reasoning for this prediction.
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The method by which the cost-of-living adjustment (COLA) for Social Security is determined
Prior to explaining the reasoning behind my forecast, it is crucial to grasp the method used to calculate the Social Security COLA. The fundamental objective of COLAs is to safeguard Social Security benefits from losing their value due to inflation. inflation Predictably, inflation figures play a central role in determining the Social Security COLA adjustment.
What inflation data does the Social Security Administration (SSA) utilize to calculate the yearly COLA rate? It does not rely on the commonly mentioned figures. The primary inflation metric used is the Consumer Price Index (CPI), specifically the Consumer Price Index for All Urban Consumers (CPI-U).
Nevertheless, the Social Security Administration uses a separate measure, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), to determine the annual Cost of Living Adjustment (COLA). This index specifically considers the prices faced by people living in urban areas where at least 50% of the household income comes from clerical or hourly wage positions.
SSA is responsible for determining the percentage change, if any, between the average CPI-W in the third quarter of the current year and the average CPI-W in the third quarter of the prior year. This figure is then rounded to the nearest tenth of a percent. In cases where there is no increase, individuals receiving Social Security benefits will not be given a Cost of Living Adjustment (COLA).
What is the basis for forecasting a higher cost of living adjustment (COLA)?
I believe that the Social Security cost-of-living adjustment (COLA) for 2025 will likely be higher than the current predictions due to an anticipated rise in inflation in the third quarter. This increase is expected to push the COLA beyond the estimated range of 2.6% to 2.7%.
It is highly likely that the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in the third quarter will exceed the average from the second quarter. The average CPI-W has consistently increased in the third quarter compared to the second quarter every year since 1974. With only three exceptions, the average CPI-W has shown a year-over-year increase in all other years during this period.
The inflation rate compared to the previous year has been decreasing overall since June 2022. I anticipate that it will rise in the third quarter due to the expected increase in oil prices. When oil prices go up, the prices of various products also tend to increase.
Certainly, the drop in oil prices as of late can be attributed to heightened concerns regarding a potential issue. recession Following a discouraging July employment report, I believe the concerns are exaggerated. The rise in unemployment was not due to layoffs, but rather a result of more individuals returning to the workforce.
At the same time, there was a rise in Chinese imports of crude oil and natural gas in July. This indicates that the demand is still high, suggesting that prices will not decrease.
Increased tension in the Middle East has been observed, as Iran has issued a warning to retaliate following the killing of Hamas leader Ismail Haniveh in Tehran. Should Iran launch an attack on Israel, anticipate a significant rise in oil prices.
Being higher doesn’t necessarily imply a significant increase.
Although I anticipate that the Social Security COLA for 2025 will exceed the current predictions, I do not foresee it being as high as some may anticipate. much I believe that retirees might see a rise in their Social Security benefits of around 2.8% to 2.9%, rather than the previously expected 2.6%.
My forecast may not be accurate, as circumstances can quickly evolve.
We will need to wait until October to discover the Social Security COLA. Regardless of the specific figure, it is certain that retirees will feel the impact of inflation long before they see any benefits from an increase in their payments.
