Social Security 2025: The latest COLA adjustment might disappoint US retirees
After an unprecedented 8.7% COLA increase in 2023, retirees could see a smaller COLA in 2025. With inflation still rising, many retirees are worried that the upcoming COLA adjustment will fall short of their expectations.
Retirees may face an unwelcome surprise next year: despite inflation remaining high in March, Social Security benefits could receive a smaller cost-of-living adjustment (COLA) in 2025.
After inflation spiked toward the end of the pandemic, retirees received an exceptional 8.7% COLA increase in 2023, the largest in four decades. However, despite this historic boost, the 2023 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) found that many retirees still faced financial difficulties throughout the year. It appears that even with larger checks, inflationary pressures have been too overwhelming to overcome.
COLA Challenges: smaller increases and growing concerns
Adding to retirees' frustration, this year's COLA was only 3.2%, which disappointed many. A survey by The Senior Citizens League (TSCL), an advocacy group for seniors, showed that 71% of retirees reported that their household expenses have increased by more than 3.2%. Even worse, 53% of retirees said they’ve already tapped into their emergency savings.
As a result, many retirees are likely hoping for a larger COLA in 2025. Unfortunately, the latest projections from TSCL suggest that the adjustment will shrink again. It seems that inflation is still very much a concern, and retirees will be left to shoulder the burden.
Why COLA's may not keep up with inflation
Social Security's COLA is determined by the average inflation rate from the third quarter (July, August, and September) using the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). This subset of the more widely used CPI-U is used for calculating adjustments, although it's a narrower sample.
The formula is simple: the CPI-W from the third quarter of the current year is divided by the same period from the previous year, and the result determines the COLA for the next year. For instance, the CPI-W increased by 3.2% in the third quarter of 2023, which led to a 3.2% COLA increase for 2024.
Preparing for a possible COLA increase, while staying cautious
While the 2.6% increase is a rough estimate, the Social Security Administration won’t finalize the COLA until the third-quarter inflation data is available, typically in mid-October. In the meantime, retirees should hope for the best but prepare for the worst. Smart budgeting and careful spending are always wise, especially if the COLA doesn’t provide the cushion they were hoping for. It’s better to be prepared for a financial downturn than to be caught off guard when costs rise.
Inflation still rising in America
Although inflation has cooled since peaking in June 2022, there’s been a troubling recent trend of rising consumer prices. The CPI-W grew by 2.9% in January, 3.1% in February, and 3.5% in March—the largest increase in seven months. This uptick suggests inflation isn’t over, and retirees may be in for a smaller COLA in 2025.
The March CPI-W reading of 3.5% is particularly concerning, as it exceeds the 3.2% COLA applied to Social Security benefits this year. This means that benefits gained less purchasing power last month, as they grew at a slower pace than consumer prices. If this trend persists, retirees could experience tighter financial circumstances as the year progresses.
To put things into perspective, the average retired worker’s benefit was $1,910.79 per month in February 2024. If the COLA for 2025 is 2.6%, that would increase monthly benefits to $1,960.47, providing an additional $49.68 per month. While it’s not a substantial amount, every little bit helps, especially as prices continue to rise.