Government is worried about COLA for 2025: inflation could destroy everything, and it will affect you

The federal government has just announced a last-minute change to the COLA for 2025. The path of financial stability that had been stated before the Senate seems to be behind us, and we could now be going through a period of uncertainty due to inflation. However, here’s what could happen next year and how it could affect you.

COLA of 2025, unveiled: experts start to worry (and so does the government)

The cost-of-living adjustment (COLA) for Social Security benefits is crucial for the financial wellbeing of seniors and people with disabilities who rely on these benefits. COLA is an annual increase in monthly Social Security payments to account for inflation.

It helps protect the buying power of Social Security income by adjusting benefit levels to keep pace with rising prices. Without a COLA, Social Security benefits would erode over time as inflation gradually decreases recipients’ purchasing power.

By law, the Social Security Administration determines the COLA each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as calculated by the Bureau of Labor Statistics. The COLA aims to ensure seniors who depend on fixed Social Security income can afford basic necessities like food or housing.

COLA 2025 forecasts, in detail: what will happen in the coming year

Most forecasts predict that the cost-of-living adjustment (COLA) for Social Security benefits in 2025 will be very low, possibly even negative. The COLA is determined each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) calculated by the Bureau of Labor Statistics.

The CPI-W measures the average change in prices that consumers pay for goods and services. If inflation is high, the COLA will be higher to help benefits keep pace. If inflation is low, the COLA will be lower. Forecasters expect inflation to cool substantially in 2023 and 2024 after the rapid price increases of 2022.

This means the CPI-W used to calculate the 2025 COLA will likely show a much lower inflation rate. Estimates for the 2025 COLA range from 0.1% on the low end to 2% on the high end. Some experts think a negative COLA is possible if deflation occurs before the calculation period.

Those who will suffer most from the COLA increase for 2025, unveiled: here’s what will happen

The main reason experts are forecasting a low COLA for 2025 is because it is based on comparing the average CPI from Q3 2023 to Q3 2024. Inflation was unusually high in 2022 and 2023 due to pandemic recovery and the war in Ukraine (and the funds we are donating to the country).

This means the Q3 2024 CPI used to calculate the 2025 COLA will be based on a very high base CPI from Q3 2023. Even though inflation may start declining in 2024, it’s the year-over-year change that matters. If the Q3 2024 CPI decreases just 2-3% from Q3 2023, that will still be a very small increase compared to the high base.

So the 2025 COLA could end up being only 1-2%, even if inflation is calming down by then. Essentially, the high inflation now gets locked in to the COLA formula, suppressing adjustments for several years. By basing COLA on the change in CPI 12 months prior, it will lag behind real-time inflation that beneficiaries experience.

A low COLA in 2025 will have major impacts on seniors relying on Social Security benefits as their primary income source. With high inflation eating away at their fixed incomes, many seniors will see a drastic reduction in purchasing power if the 2025 COLA increase is only around 1-2% as projected.

As you have seen, the COLA of 2025 will be marked by the runaway inflation we have experienced since 2021. The exit from the pandemic, the economic recovery and the multi-billion dollar bailouts to Ukraine have hurt our stability. This is the reason why the Government has activated the new budget control mechanisms, which we hope will not result in a shutdown.

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