If you are retired or nearing retirement, you may be uneasy about your financial situation. You wouldn’t be alone. A recent survey from The Senior Citizens League (TSCL) — a senior citizen advocacy organization — showed 62% of seniors fear that soon they won’t be able to cover basic essentials like food and utilities. That’s a pretty dire picture.

For these seniors, Social Security is a lifeline, an essential part of their income without which they’d be unable to get by. In fact, about 40% of retirees receive at least half of their income from the Social Security Administration (SSA). One in seven rely almost entirely on the program, receiving more than 90% of their income from benefits.

The SSA wants to help seniors avoid the squeeze brought on by inflation, which has been abnormally high over the last few years. Every year, it makes a cost-of-living adjustment (COLA), raising benefits for the coming year to — hopefully — account for rising costs. This year is no different, but as seniors have felt for a while, it might seem a bit light. Why?

How the COLA is calculated

Prior to 1975, an act of Congress was required for any COLA. That meant large stretches of years could go by with no raise. Thankfully, in the early ’70s, Congress made the COLAs a bureaucratic issue, rather than a legislative one. Beginning in 1975, COLAs would happen every year and and would be calculated automatically using a specific formula. As prices rose, so too would SSA benefits, protecting retirees from income erosion.

The SSA takes the CPI-W — a measure of inflation released every month from the Bureau of Labor Statistics (BLS) — from July, August, and September and then adjusts benefits for the following year accordingly.

The COLA is far from perfect

Here’s the issue. That BLS metric, the CPI-W? It’s an acronym for the Consumer Price Index for Urban Wage Earners and Clerical Workers. When the BLS is looking at changes in pricing to calculate the CPI-W, it’s looking at items that a person of typical working age is buying. While there is a lot of overlap — most people eat eggs and buy gas whether they are retired or working — there are some significant differences between the spending habits of workers and retirees.

Chief among these are healthcare costs, which have largely been rising faster than other spending categories. Retirees spend a significantly larger portion of their income on healthcare than their working counterparts. This means that the COLA is more often than not falling a bit short. TSCL estimates seniors have lost more than 30% of their actual purchasing power since 2000.

2025’s COLA is here

The SSA announced earlier this month that 2025’s COLA will be 2.5%. This is certainly less than the last few years but it’s actually closer to the historic mean. Will that be enough for you if you are in retirement? Will it actually keep up with inflation? Likely not.

If you look closer at the numbers released by the BLS, you can see where the use of a metric that isn’t specific to seniors is a mistake. While prices for many items are still rising, prices for many others, like new cars, have actually fallen significantly in the last year, keeping the overall CPI-W relatively low. How many retirees do you know who are buying new cars? Sure, some do, but this is a much more common purchase if you are still working. Healthcare services, on the other hand, saw prices rice by 3.6%.

All of this means that retirees — and those who are looking ahead to retirement — will want to do all they can to save and invest for their golden years ahead. If you haven’t already, now is always a great time to start.