The Social Security Administration recently announced the cost-of-living adjustment (COLA) for 2025, and many retirees are disappointed by the news. The COLA for next year will be 2.5%, the lowest since 2021. Once the 2025 COLA takes effect, the average retiree will receive about $50 more per month.
However, with costs remaining high, these smaller COLAs are not providing much help for retirees in managing their expenses. In a 2024 survey, many retirees said that the adjustments offer little to no assistance with everyday costs. While there is some positive news about the 2025 COLA, there is also some concerning information to be aware of.
The COLA is directly linked to changes in inflation, so smaller adjustments indicate that inflation is slowing down. Lower costs should benefit retirees more than larger COLAs, which should be good news. However, Social Security has consistently had trouble keeping pace with rising costs.
In fact, inflation has surpassed the COLA in four out of the last five years. The only year the COLA came out ahead of the inflation rate was 2023, which had a record-breaking 8.7% COLA, the highest in about 40 years. This struggle may be partly due to how the COLA is calculated.
The Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures changes in costs that mainly affect workers. Some experts have advocated for the SSA to start using a different index, specifically the CPI-E, which tracks costs impacting adults age 62 and older. Using the CPI-E instead of the CPI-W could lead to larger COLAs that are better suited to retirees’ financial needs.
Retirees’ disappointment with 2025 adjustment
Social Security’s ongoing financial difficulties could make it even less probable that we will see more effective COLAs in the future. For years, the Social Security program has been operating at a deficit.
The income from payroll taxes and other sources has not been sufficient to fully fund benefit payments, so the SSA has been using money from its trust funds to fill the gap. The SSA Board of Trustees’ latest estimates suggest that the trust funds will likely be exhausted by 2035. When that happens, the current income sources will only cover about 83% of scheduled benefits, meaning retirees could face a 17% reduction in their benefits within the next decade or so, unless lawmakers find a solution quickly.
The more the SSA pays out in benefits, the faster it will deplete the trust funds, and the sooner cuts will become a reality. While higher COLAs would have an immediate impact on retirees’ bank accounts, they could also lead to bigger issues in the future. There may be little you can do about the COLA or the future of Social Security, but you can take actions to increase your savings or at least have realistic expectations about how far your benefits will stretch.
If you can continue working or find another source of income, that could help extend your savings. This approach may not be possible for everyone, but if Social Security is going to be less dependable going forward, it is beneficial to do what you can to reduce your reliance on your benefits. Cutting back on your spending, if possible, can also help your savings last longer.
If your savings are in a retirement account like a 401(k) or an IRA, that money will continue to grow as long as it remains in your account. Even if you cannot increase your savings, keeping more of your nest egg untouched can help your money grow over time. Many retirees are already having a hard time making ends meet, and the disappointing COLA may not provide much assistance.
However, by staying informed about Social Security’s future, you can take as many steps as possible to safeguard your savings.
