The numbers are in: U.S. retirees will receive a significantly lower annual Social Security cost-of-living adjustment (COLA) in 2025 than they received this year. The annual percentage increase has declined for two consecutive years.
This trend might continue, depending on the outcome of the upcoming elections. Here's why your next Social Security COLA, in 2026, could be lower if Vice President Kamala Harris wins in November.
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The link between inflation and Social Security COLAs
Would Harris set the amount of the Social Security COLA if she becomes president? No, but her economic policies could very well affect the annual adjustment. To understand why, we must look at the link between inflation and COLAs.
The purpose of the COLA is to prevent the buying power of Social Security benefits from being eroded too much by inflation. Your annual benefits increase is entirely dependent on the inflation rate.
Inflation is measured in several ways. The important metric for Social Security COLAs is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The index tracks the average change in prices for a basket of goods and services paid by workers in urban areas.
Each October, the Social Security Administration (SSA) calculates the annual COLA for the following year by comparing the average CPI-W for the third quarter with the average for the third quarter of the previous year. The increase (if any) is rounded to the nearest one-tenth of 1% to determine the COLA. If there is no increase, there is no adjustment to Social Security benefits.
What top economists predict
Both Harris and her GOP opponent, former President Donald Trump, have put forward several major economic proposals that they pledge to implement if elected. The consensus among top economists is that Harris' plans would lead to lower inflation than Trump's.
The Financial Times and the University of Chicago surveyed nearly 40 leading economists. When asked which presidential nominee's proposals would likely lead to higher inflation, 70% responded that Trump's policies would be more inflationary. Only 3% said that Harris' policies would cause greater inflation.
Moody's analyzed the proposed economic policies of Harris and Trump. The company estimated that Trump's plans would increase inflation by 1.1% in 2025. Under a Harris administration (even with the GOP in control of Congress), Moody's projected that inflation would "steadily moderate" and decline to 2% by the summer of 2025.
Why do so many economists view Harris' economic policies as better for inflation than Trump's? The main issue is the GOP nominee's proposed tariffs.
Trump wants to impose tariffs of 10% to 20% on all imported products. He wants even steeper tariffs of 60% on goods imported from China. The former president has also said products made in Mexico that are shipped to the U.S. could be hit with 100% tariffs.
Tariffs can lead to higher inflation as importers pass their higher costs on to consumers. Domestic producers could also increase their prices to take advantage of the changed competitive dynamics.
Are lower Social Security COLAs good for retirees?
If Harris wins in November, inflation could continue its downward trajectory based on the estimates of many economists. This would translate to lower Social Security COLAs. But is that a good thing for retirees?
Some might see a lower annual COLA in a negative light. However, it's better for retirees to receive lower Social Security increases for two key reasons.
First, COLAs are paid after retirees pay higher costs for goods and services. Importantly, Social Security doesn't adjust the COLA to account for the time value of money. Your financial position is better with lower inflation and lower COLAs.
Second, the CPI-W inflation metric that is used to calculate Social Security COLAs doesn't necessarily accurately reflect the costs incurred by retirees. In particular, the metric doesn't weigh healthcare costs as heavily as it should.
No guarantees
Is it a slam dunk that retirees' COLAs could be lower if Harris is elected president? No. For one thing, the economists might be wrong.
An even bigger factor, though, is that events can occur that lead to higher inflation (and higher COLAs) that are outside the control of any president. Oil prices could skyrocket due to conflicts in the Middle East. Union workers could strike and disrupt supply chains. Another pandemic could lead to soaring global inflation as we saw after COVID-19 struck.
These are the kinds of issues that have led to higher inflation and bigger Social Security COLAs in the past. It's possible they could do so again, regardless of whether Harris or Trump wins in November.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody's. The Motley Fool has a disclosure policy.
