2025 COLA Projection: COLA, or Cost of Living Adjustment, is a mechanism that is employed to guarantee that specific payments, such as military pensions or Social Security benefits, remain under inflation and fluctuations in the cost of living.
Frequently, various contexts implement COLA, including military pensions, Social Security benefits, and certain employment contracts. It assists individuals and families in managing inflation and elevated prices for products and services.
According to the early-doors projection for 2024, the COLA will drop to 2.7%, which is still higher than the Senior Citizens League’s predicted rates of 1.4% in January and 1.75% in February. Consequently, it appears that prices are increasing once more.
What will be the consequences?
After establishing it, we apply the COLA percentage to adjust the benefits or compensation. A three percent COLA for Social Security benefits would raise claimants’ compensation by three percent.
Adjusting fixed payments to reflect cost-of-living changes ensures their purchasing power remains constant.
In autumn 2023, the economy is improving, but it will take a long time to meet President Joe Biden’s two percent inflation target before the November 2024 presidential election.
Fortunately, the current situation is significantly better than the highest COLA on record, which was 14.3% and occurred in 1980.
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How is COLA calculated?
This calculation analyzes different Consumer Price Index (CPI) periods over the annual financial quarters to give the government millions of data points for the third quarter adjustment.
The procedure typically commences with the selection of a baseline period, which serves as a reference point for comparison. This baseline period frequently represents the average CPI over a specific duration.
Next, the current CPI is determined by averaging the CPI over the most recent period. This enables an evaluation of the evolution of the cost of life.
Looking at the discrepancy between the CPI of the current period and that of the baseline period calculates the COLA. For example, the COLA would be three percent if the CPI has increased by three percent since the baseline period.
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