A new cost-of-living adjustment (COLA) forecast has emerged, and it might come as a surprise to many Social Security beneficiaries. For years, the COLA has been a lifeline to help retirees keep up with inflation.
But the projected COLA for 2025 is unexpectedly low, leaving many seniors concerned about their financial security in the coming years. Despite larger COLA increases in recent years, the purchasing power of Social Security benefits has been declining, according to The Senior Citizens League (TSCL).
Contents
Shrinking Purchasing Power
Since 2010, the purchasing power of Social Security benefits has dropped by 20%, as per TSCL. This means that while benefits have increased, they haven’t kept pace with rising costs of essentials like housing and healthcare. Even though retirees received substantial COLA increases—5.9% in 2022, 8.7% in 2023, and 3.2% in 2024—many feel it wasn’t enough. Over two-thirds of TSCL’s survey respondents said the most recent COLA didn’t meet their rising expenses.
For retirees, this gap between income and inflation is particularly concerning, as they are more vulnerable to cost increases. Inflation hits those on fixed incomes the hardest, as they have fewer opportunities to adjust their earnings. According to Schroders’ 2024 U.S. Retirement Survey, less than half of respondents believe they’ll have enough savings to live comfortably in retirement, and more than 90% fear that inflation will continue to erode their savings.
| Year | COLA Increase |
|---|---|
| 2022 | 5.9% |
| 2023 | 8.7% |
| 2024 | 3.2% |
| 2025 | 2.5% (Projected) |
Expected 2025 COLA
Given the recent high COLAs, retirees may be shocked to learn that the 2025 COLA is projected to be just 2.5%. If accurate, this would mark the smallest COLA increase since 2021, when Social Security recipients received a 1.3% adjustment. The Social Security Administration (SSA) calculates the COLA based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), using data from the third quarter (July to September).
Although the official COLA won’t be announced until October 2024, the projected 2.5% increase is a far cry from the higher percentages seen in previous years. This lower estimate reflects the trend of declining CPI-W inflation, which dropped from 2.9% in January to 2.4% in August. While inflation is easing in some areas, it’s not necessarily good news for retirees who are already feeling the pinch of rising living costs.
Impact on Retirees
For Social Security recipients, a smaller COLA in 2025 could spell trouble. The issue isn’t just the size of the COLA, but the way it’s calculated. The CPI-W, which tracks inflation for office workers and hourly wage earners, doesn’t accurately reflect retirees’ spending habits. Retirees spend more on essentials like housing and healthcare, which tend to rise faster than other costs.
For example, in August 2024, while the CPI-W rose 2.4%, housing costs shot up 4.3%, and healthcare increased by 3.3%. These categories are more significant for retirees, meaning that the CPI-W might understate the real impact of inflation on their day-to-day expenses. As a result, a lower COLA could further reduce the purchasing power of benefits.
| Expense Category | Price Increase (August 2024) |
|---|---|
| Housing | 4.3% |
| Healthcare | 3.3% |
| General CPI-W | 2.4% |
CPI-E Alternative
To get a better sense of how inflation impacts seniors, many experts argue for using the Consumer Price Index for the Elderly (CPI-E), which tracks inflation based on the spending habits of people aged 62 and older. In August, the CPI-E grew by 2.9%, which was half a percentage point higher than the CPI-W. This suggests that the CPI-E more accurately captures the inflation experienced by retirees.
While the CPI-W focuses on general workers’ spending, it doesn’t account for the higher proportion of income retirees spend on medical care and housing. If the Social Security Administration used the CPI-E to calculate the COLA, retirees might see a more meaningful adjustment that keeps up with their actual costs. As it stands, a 2.5% COLA for 2025 could reduce the already limited purchasing power of Social Security benefits if inflation in key areas like housing and healthcare continues to rise.
What This Means
The projected COLA for 2025 may disappoint many Social Security recipients, especially given that inflation in housing and healthcare costs is outpacing the general CPI-W. Without a significant adjustment to account for retirees’ unique spending patterns, many will struggle to make ends meet. While the SSA’s official COLA announcement is still months away, retirees should prepare for a lower-than-expected increase.
In the meantime, retirees should explore other ways to manage their costs, whether by tightening their budgets or seeking additional income streams. The COLA may provide some relief, but it’s unlikely to fully offset the rising costs in key areas that affect seniors.
FAQs
What is the projected COLA for 2025?
The COLA for 2025 is projected to be 2.5%, the lowest since 2021.
How is COLA calculated?
COLA is based on the CPI-W, which tracks inflation during July to September.
Why do retirees feel COLA doesn’t keep up with inflation?
COLA doesn’t fully account for the higher costs of housing and healthcare.
What is CPI-E?
CPI-E measures inflation for people aged 62 and older, focusing on retirees’ spending.
Will the COLA for 2025 be enough to cover rising costs?
Many retirees may find the 2025 COLA insufficient to meet rising living expenses.
