The Social Security Administration recently announced the 2025 cost-of-living adjustment (COLA). Many retirees feel discouraged by the 2.5% increase, the lowest since 2021. Once the 2025 COLA takes effect, the average retiree will collect roughly $50 more per month.
As costs remain high, shrinking COLAs aren’t going far in helping retirees manage everyday expenses, according to a 2024 survey from The Motley Fool. In theory, smaller raises should be good for retirees since they indicate slowing inflation. Lower costs can help retirees more than larger COLAs.
However, Social Security has consistently struggled to keep up with rising costs. Inflation has outpaced the COLA in four of the last five years. The only year the COLA surpassed the inflation rate was 2023, which saw a record-breaking 8.7% COLA, the highest adjustment in roughly 40 years.
Part of this struggle may be due to how the COLA is calculated. The SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers, which measures changes in costs that primarily affect workers. Some experts argue for using the CPI-E, which tracks costs impacting adults aged 62 and older.
Using the CPI-E rather than the CPI-W could result in larger COLAs more tailored to retirees’ financial needs. There are many reasons behind the SSA’s reluctance to pay out higher COLAs even as the adjustments fail to meet rising costs.
Shrinking COLAs and rising costs
The system is complicated, requiring mountains of bureaucratic red tape for even small changes. Social Security’s consistent financial issues could make it even less likely to see more effective COLAs going forward. For years, the Social Security program has been running at a deficit.
Income from payroll taxes and other sources hasn’t been enough to fund benefit payments fully, so the SSA has been pulling money from its trust funds to bridge the gap. According to the SSA Board of Trustees’ most recent estimates, the trust funds will likely be depleted by 2035. When that happens, current income sources will only be enough to cover around 83% of scheduled benefits, meaning retirees could see their benefits cut by 17%.
While there may be nothing you can do about the COLA or the future of Social Security, you can increase your savings or maintain realistic expectations about how far your benefits will go. If possible, continuing to work or finding an additional source of income could help stretch your savings. This strategy may not be feasible for everyone, but reducing dependence on Social Security can be beneficial.
Reducing your spending, where possible, can also help your savings last longer. If your savings are in a retirement account like a 401(k) or IRA, your money will grow for as long as it sits in the account. Even if you can’t increase your savings, keeping more of your nest egg untouched can help your money grow over time.
Millions of retirees are already struggling to make ends meet, and the disappointing COLA may not help much. By staying updated on Social Security’s future, you can take steps to protect your savings.
