This massive flaw in the way Social Security COLAs are calculated could hurt retirees in 2025.

There has been a lot of speculation about the upcoming Social Security cost-of-living adjustment (COLA). While we are getting closer to an official announcement for 2025, that information is not yet available.

The Social Security Administration plans to release its 2025 COLA announcement on October 10. But based on what we know so far, it looks like seniors may be disappointed with the number that will be released. But there’s a reason for that, and it comes from a huge flaw in the way Social Security’s COLA is calculated.

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To put it mildly, an imperfect formula

Social Security COLA rates are calculated based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of the year. When the CPI-W rises from one year to the next, Social Security benefits increase the following year. When the CPI-W falls or stays the same, Social Security benefits stay the same.

Fortunately, Social Security recipients don’t have to worry about their benefits going down because of falling inflation. They can only go up. But even if Down are rising, but these increases often do not allow seniors to maintain purchasing power from year to year.

The problem is that while the CPI-W can be a useful economic tool in its own right, it’s not the most appropriate tool for measuring Social Security COLA rates. And all we need to do is think about what the CPI-W measures to understand why.

The CPI-W focuses on expenses that working-age Americans living in urban areas tend to face. However, Social Security recipients are largely retirees who do not work. In addition, many Social Security recipients do not live in urban areas because they do not need proximity to jobs.

Because of these factors, the CPI-W does not adequately capture the costs that Social Security recipients typically face. It also does not emphasize senior-related expenses, such as health care, that consume a significant portion of retirees’ Social Security income.

That’s why advocates have long pushed for a better way to calculate Social Security COLA rates—using the Consumer Price Index for the Elderly, or CPI-E. A rate focused on older Americans is more likely to lead to COLA rates that provide more benefits.

But while we may see a change in the way Social Security COLAs are calculated in the future, it won’t happen in time for 2025. As a result, seniors may find that next year’s COLA won’t let them down to some extent.

Let’s hope that the situation will change in the future

It may be too late to give seniors access to Social Security’s more generous and impactful COLA rate in 2025. But don’t assume such a change won’t happen eventually.

For now, seniors on Social Security should know that the estimated COLA for 2025 is 2.5%. However, that number could go up or down slightly by October 10.

Whether a COLA of this size will be beneficial to seniors will depend on how inflation plays out in the coming months. Either way, a major change in the way these increases are calculated is needed. Until that happens, seniors should try to be less dependent on Social Security COLAs.

A good way to do this is to find ways to generate income, whether passively through investments or actively by joining the gig economy. Either of these steps could ease the pressure on those COLAs and lead to less financial stress when they’re overwhelmingly tight.

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