The 2025 Cost of living Adjustment (COLA) is in the midst of being discussed and the Federal Reserve, organism that sets the consumer prices indexes and controls inflation, has given strong indication that the increase will be quite sharp.
The Federal Reserve (the Fed) holds a dual mandate: to strive for maximum employment while simultaneously ensuring price stability. However, over the course of the last three years, its task has been hard to fulfill given the rising inflation. Currently, its primary objective is to bring this inflation down below the target threshold of 2%, a task that has been ongoing since the beginning of the year and is proving difficult to achieve.
In a statement released by the Federal Open Market Committee (FOMC) on May 1 this difficulty was publicly acknowledged “In recent months, there has been a lack of further progress toward the Committee’s 2% inflation objective”.
In March, the Consumer Price Index (CPI) registered a notable increase of 3.5%. Core inflation, which did not account for the volatile costs of food and energy, surged even higher at 3.8%. These figures are noteworthy as they surpass the 3.2% COLA that retirees received at the beginning of the year.
The concern is that inflation did not progress towards the Federal Open Market Committee’s target but continues to rise. With two months remaining before the CPI readings factor into the COLA calculation, there remains a window for potential shifts in the economic landscape. However, the FOMC’s outlook is notably less optimistic compared to last fall when it hinted at the possibility of up to three interest rate cuts this year to counter easing inflation. As of today, there is no clear indication of when interest rates might be adjusted.
Jerome Powell Chairman of the FOMC released a statement with the official position on the matter “So far this year, the data have not given us that greater confidence [that inflation is falling] It is likely that gaining such greater confidence will take longer than previously expected.” But the situation is not expected to get worse, and the Fed is not expected to increase interests again any time soon.
How the COLA increase will affect seniors
This failure to bring inflation down is affecting every aspect of life, especially for those on the fixed income that Social Security signifies. Since the Social Security Administration rises the COLA by using inflation rates from the last quarter of the previous year as determined by the consumer price index, pensioners could be receiving a higher cost-of-living adjustment than expected. Even though more money in their pocket seems to be a good thing, especially if the economy stabilizes and keeping up with the cost of living does not require a second full time job as coupon collector, the increase may push some of them into a different tax bracket eliminating the effects of the rise and still leaving them underfoot.
With all this said and done, the news are still not encouraging for retirees, The Senior Citizens League increased its COLA forecast from 1.75% to 2.6% last month and expects to have to make other adjustments.
Of course these adjustments will probably still not be enough, the calculation of the COLA are based on a particular Consumer Price Index (CPI) reading known as the CPI-W, or the Consumer Price Index for Urban Wage Earners and Clerical Workers. However, it’s important to recognize that the spending patterns of a young professional differ significantly from those of a retiree. For retirees, a more accurate representation of their expenditure comes from a CPI reading known as the CPI-E, or the Consumer Price Index for Americans aged 62 and older. The CPI-E is tailored to reflect the basket of goods and services that seniors typically spend their money on, offering a more relevant measure for calculating adjustments to their benefits.
Basing the increase on the wrong thing and making it so that the taxable income is higher and thus negates the increase are the two key problems seniors are battling when it comes to their thriving in today’s economy.