Millions of seniors today rely on the monthly benefits they get from Social Security to stay afloat financially. And each year, Social Security recipients eagerly await news of an upcoming cost-of-living adjustment, or COLA.
In 2024, Social Security benefits rose 3.2%. But next year, seniors may not see their benefits go up nearly as much.
Based on recent inflation data, the nonpartisan Senior Citizens League is projecting that Social Security’s 2025 COLA will amount to 1.75%. Now that number is far from set in stone, since Social Security COLAs are based on third quarter inflation data, which it’s clearly too early to gather. But it is fair to assume that based on how inflation is trending, Social Security recipients will be in line for less of a raise in 2025 than in 2024.
Still, there’s a good chance your 2025 Social Security COLA will cause you to lose buying power no matter how much it amounts to. Here’s why.
A flawed system
Social Security COLAs are based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The problem, though, is that the CPI-W is not very reflective of the costs seniors tend to face.
One major flaw in the way Social Security COLAs are calculated is that healthcare is a major expense for retirees, and one that tends to increase exponentially from one year to the next. But it’s not a heavily weighted factor in the CPI-W. As such, those COLAs often fall short for seniors even when they’re more generous.
A Motley Fool survey conducted in late 2022 — just months after the announcement of an 8.7% Social Security COLA for 2023 — found that according to more than 50% of respondents, that COLA wasn’t enough. And if 8.7% isn’t enough, it’s fair to assume that 2025’s COLA will fall short even more.
In fact, the Senior Citizens League found that 38% of seniors worry their 2024 COLA will fall short of inflation this year. And a 2023 study by the group also found that Social Security benefits have lost 36% of their buying power since the year 2000.
A serious overhaul is needed
Senior advocates have long been pushing for an alternate means of calculating Social Security COLAs — namely, using a senior-specific index rather than relying on the CPI-W, which doesn’t accurately reflect the costs seniors commonly face. But until that change goes through, Social Security recipients may end up sorely disappointed with their COLAs, even during periods when they come in at a pretty high rate.
Of course, all of this underscores the importance of entering retirement with adequate savings. Those who have nest eggs to fall back on can often worry less about Social Security COLAs since they have outside income to access.
And unlike Social Security COLAs, many people’s personal portfolios are invested in a manner that can, in fact, outpace inflation, which puts savers at a strong advantage. So if you want to avoid a retirement scenario where you have to stress over a Social Security COLA from one year to the next, make an effort to fund your IRA or 401(k) plan while you’re still earning a paycheck.
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Here’s Why Your 2025 Social Security COLA Might Fall Short — No Matter How Much It Amounts To was originally published by The Motley Fool