Welfare recipients receive an annual cost-of-living adjustment (COLA) to protect the purchasing power of benefits from inflation. But the Senior Citizens League (TSCL), one of the largest nonprofit senior advocacy groups in the U.S., estimates that the purchasing power of benefits has declined 20 percent since 2010. “COLAs are becoming increasingly unlikely to keep pace with inflation over time,” the TSCL wrote in a recent press release.

This is surprising because welfare recipients have received relatively high COLAs in recent years: 5.9% in 2022, 8.7% in 2023 and 3.2% in 2024. Before that, COLAs had not exceeded 3% since 2012. But more than two-thirds of welfare recipients surveyed by TSCL said the recent COLA was not enough to cover the increase in their household expenses.

As a result, many retirees are struggling financially, with less than 50 percent believing they have enough money to live comfortably in retirement and nearly 90 percent worried that inflation will erode the value of their savings, according to investment manager Schroders’ 2024 US Retirement Survey.

With that in mind, it may come as a surprise to welfare recipients that TSCL recently revised its 2025 COLA forecast downward to 2.5%, the smallest increase since 2021. Here are the important details.

Welfare recipients likely to receive the lowest COLA since 2021

Since 1975, Social Security benefits have been adjusted annually based on inflation in the third quarter of each year, the three-month period between July and September. Specifically, cost-of-living adjustments (COLAs) are tied to a subset of the consumer price index known as the CPI-W.

The math is simple: Divide the current year’s third-quarter CPI-W by the previous year’s third-quarter CPI-W, and the percentage increase gives the following year’s COLA. This means that the Social Security Administration cannot calculate the official COLA for 2025 until September’s CPI-W data is available, which will not be until October 10, 2024.

However, CPI-W inflation has fallen from 2.9% in January to 2.4% in August, so the Senior Citizens League (TSCL) estimates that benefits will increase by 2.5% in 2025. The last time Social Security benefits had a COLA below 3% was in 2021. That may be a concern for retirees, especially those in financial difficulty, but a lower COLA in and of itself is not the real problem.

Social benefits are likely to lose even more purchasing power in 2025

The real problem with a lower COLA in 2025 is the way it is calculated. The CPI-W measures inflation based on the spending habits of office workers and hourly wage earners. People in these categories tend to be younger than those on welfare, and young people tend to spend their money differently.

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Most importantly, retirees receiving Social Security benefits tend to spend more on housing and medical care, so from their perspective, the CPI-W understates the importance of these spending categories. This is problematic because the CPI-W rose 2.4% in August, but housing and medical costs rose 4.3% and 3.3%, respectively.

So what we have is above-average inflation in underrepresented spending categories. This means that the CPI-W underestimates the impact of inflation on retirees. We can bolster our argument by looking at the CPI-E, a subset of the Consumer Price Index that measures inflation based on the spending patterns of people age 62 and older, a group that more closely resembles the average welfare recipient.

The CPI-E rose 2.9% in August, half a percentage point higher than the CPI-W, which rose 2.4%. This supports the notion that the CPI-W is an inaccurate measure of retiree inflation. And if current trends continue, the COLA for 2025 will likely be half a percentage point too low, meaning Social Security benefits will lose purchasing power next year.

Unfortunately, welfare recipients have few options for earning money other than careful budgeting and part-time work. However, two additional sources of income worth considering are high-interest savings accounts and certificates of deposit (CDs). Interest rates are at their highest in decades, so retirees who save money today should have some extra money in the future.

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The Social Security cost-of-living adjustment (COLA) forecast for 2025 was just updated. The bad news may surprise retirees. was originally published by The Motley Fool