Understanding the COLA and its Impact on Social Security Recipients

Written By: Garrett Bohler – Wealth Manager

As we leave October behind us, we now know how much of a cost-of-living adjustment (COLA) Social Security recipients are going to receive in 2025. The Social Security Administration announced that based on the CPI-W they would be giving an adjustment of 2.5% to current Social Security recipients.

Now the questions begin of how they get to that amount and how it affects you.

1. What is the CPI-W and how is it used?

CPI-W stands for Consumer Price Index Urban Wage Earners and Clerical Workers. The CPI-W is a monthly measure of the average change over time in the prices paid by urban wage earners and clerical workers for a market basket of consumer goods and services. The CPI-W is based on the spending patterns of urban wage earners and clerical workers.

The Social Security Amendments of 1972 enacted a law requiring  annual Cost of Living Adjustments for Social Security recipients starting in 1975. Prior to 1975, the only way that Social Security recipients were given an adjustment was through special legislation by congress, now when the CPI-W is released each October at the end of Q3, they announce the cost-of-living adjustment based off how much inflation has increased compared to inflation at the same time the year prior.

2. Does my Social Security benefit still get the adjustment if I have not started collecting Social Security yet?

If you have not started your Social Security benefit you are not eligible to receive the cost-of-living adjustment. While you do not receive the cost-of-living adjustment, your benefit will continue to grow by 8% year over year until you elect to start your benefit. The 8% is applied monthly, so for each month you hold off on taking your benefit it will grow by 0.666%.

Growth is capped when you reach 70 years old and determines the maximum amount you will receive from Social Security prior to annual cost-of-living adjustments.

3. If my family has not started collecting Social Security, when should we start?

While there is no mathematical equation to tell you when the best time is to start your Social Security, our team can meet with you to discuss what the most ideal scenario may look like for you and your family. Since we don’t have an end date to our retirement, meaning we don’t know exactly when we will die, there is no perfect answer to when to take Social Security. However, we can show you a number of scenarios so that you can make an informed decision on what is the best time for you and your family to start Social Security based on the information that we do know and the things that we can control.

As always, if this information brings up any questions or concerns about your current retirement plan, please contact your Wheelhouse advising team.

Sources:

https://www.investopedia.com/terms/c/cpi-w.asp