Each year, recipients of Social Security benefits look forward to the increase in the cost of living adjustment (COLA) that helps to preserve the worth of their benefits against inflation. Nevertheless, it appears that the COLA forthcoming in 2025 may be lower than what most pensioners would have wished for, and that might mean a very big dent in your retirement income.
What to Expect from the 2025 COLA
The Social Security Administration (SSA) will officially announce the 2025 COLA on October 10, but early estimates from The Senior Citizens League suggest a 2.5% increase. If that prediction holds, it would be the smallest COLA since 2021. This modest adjustment comes after a period of historically high inflation, which has burdened many Americans and reduced the purchasing power of benefits.
While inflation has cooled recently, the cost of essentials like food, housing, and medical care remains a concern for retired workers. A smaller COLA means you could see less relief from rising prices than you might have expected.
How Inflation Is Outpacing Benefits
Despite annual COLA increases, Social Security benefits haven’t kept up with inflation over time. For example, the average retired worker received $1,176 per month in 2010, but that figure had only risen to $1,860 by January 2024. According to the Senior Citizens League, the real value of those benefits should have been 20% higher to keep up with inflation. In other words, your Social Security benefits would need to be about $2,230 per month to match the true cost of living.
This shortfall is largely due to the way COLA is calculated. Currently, the SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to measure inflation. However, the CPI-W doesn’t reflect the spending habits of retirees, who often spend more on housing and healthcare and less on transportation and education.
The Need for a Better Measure of Inflation
There is a school of thought among several economists that the most suitable index to be used for calculating the cost of living adjustments for pensioners should be the Consumer Price Index for the Elderly (CPI-E), which covers individuals aged 62 years and above.
The Protecting and Preserving Social Security Act is one of the proposed policies that seeks to make the Colas use the CPI-E ratio in place of the CPI-W. This change would most likely be effective in enhancing the real value of the Social Security benefits; however, it is very unlikely that this change will take place in the foreseeable future, and thus you will have to adjust yourself to a system that may not be more favorable to your financial needs shortly.
Social Security Benefits Could Lose Purchasing Power Again
Unfortunately, the 2025 COLA is expected to fall short of real inflation for the second year in a row, further eroding your purchasing power. The CPI-E has been rising faster than the CPI-W, meaning retirees have already seen their benefits lose value in 2024. A similar outcome in 2025 could make budgeting even more difficult, especially with essential costs still on the rise.
What Can You Do?
Although you may not be able to affect how the COLA is calculated, there are some actions you can take to preserve your financial stability. If you can, consider getting a part-time job or look towards earning some additional income through ways such as certificates of deposits or high-yield savings accounts. Even during good times, there may be opportunities to sell stock in the high market to increase your cash reserves.
Given uncertain times regarding the COLA for Social Security and the risk of reliance on it, it is prudent to plan carefully and investigate possible ways of generating income during one’s retirement other than that provided by Social Security.
