With the upcoming announcement of the 2025 Cost-of-Living Adjustment (COLA), many Social Security beneficiaries, especially retirees, may be left disappointed. The adjustment, which helps to offset inflation, has been a significant factor in raising benefits over the last three years, with a cumulative increase of 18.8%.
However, as inflation appears to be under control, retirees can expect a much smaller boost for 2025. In fact, the Federal Reserve’s recent actions and projections suggest that large COLA increases may soon be a thing of the past.
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Inflation Control
One of the main reasons for the smaller COLA in 2025 is that inflation has largely been tamed. The Federal Reserve, which aggressively raised interest rates in recent years to control inflation, has now reduced rates by 50 basis points, bringing the Federal Funds rate down to between 4.75% and 5%.
This move reflects the Fed’s confidence that inflation is trending down toward its 2% target. Although this is good news for the overall economy, it means that future COLA increases are likely to be modest, as they are tied directly to inflation.
The Fed’s efforts to control inflation have a direct impact on Social Security adjustments. Since COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks inflation, lower inflation leads to a smaller COLA. While the economy may be stabilizing, retirees who rely on Social Security benefits might feel the squeeze of these smaller adjustments, especially when facing rising costs of essential goods like food and healthcare.
Predicted 2025 COLA
The Social Security Administration (SSA) uses the third-quarter CPI-W values to calculate the annual COLA. With the data for July and August already available, estimates suggest that the 2025 COLA will be around 2.6%. In July, the CPI-W increased by 2.87%, but August saw a slower rise of 2.35%. Based on current inflation trends, September’s numbers are expected to be even lower, reinforcing the likelihood of a 2.6% COLA for 2025.
This is a sharp contrast to recent years, when retirees enjoyed higher COLA increases. For example, the COLA for 2023 was 8.7%, a much-needed boost amid high inflation. However, as inflation moderates, future COLA increases are expected to be more modest, reflecting the slower pace of price increases.
Oil Prices and Inflation
One of the main factors driving inflation down is the drop in energy prices. Oil prices, which have a significant influence on the cost of goods and services, are currently at their lowest levels in over a year. Oil is now priced below $70 per barrel, a roughly 20% decline from the previous year. This drop in energy costs has contributed to lower inflation and will likely keep September’s CPI-W from rising sharply.
Since energy prices are one of the most volatile components of inflation, any significant drop in oil prices can substantially reduce overall inflation. This makes it increasingly likely that the 2025 COLA will stay below 3%, with the final number likely falling between 2.5% and 2.6%.
Preparing for 2026
Looking beyond 2025, retirees may need to prepare for even smaller COLA increases in the future. The Federal Reserve’s projections suggest that inflation will continue to decline through 2025, potentially leading to a 2026 COLA of around 2.2%. This would be lower than the expected 2025 figure, reflecting the central bank’s confidence that inflation will remain under control.
Although retirees may see smaller COLA adjustments in the coming years, the overall economic outlook is positive. With inflation under control and interest rates coming down, retirees could benefit from lower borrowing costs. For example, those with mortgages or auto loans may find it easier to refinance their debt, leading to more financial flexibility despite smaller COLA increases.
While the days of large Social Security COLA increases may be coming to an end, retirees can take comfort in the fact that inflation is being controlled. Although the 2025 COLA will likely be smaller than in previous years, this is a sign of a more stable economy and lower inflation. However, retirees should plan ahead, as future adjustments in 2026 may be even smaller. Lower inflation and interest rates could provide some relief, offering opportunities to manage debt and navigate financial challenges.
FAQs
Will the 2025 COLA be smaller than previous years?
Yes, estimates suggest the 2025 COLA will be around 2.6%.
Why is the COLA lower for 2025?
The Federal Reserve has successfully controlled inflation, reducing the need for large adjustments.
How is the COLA calculated?
The COLA is based on the Consumer Price Index for Urban Wage Earners (CPI-W).
Could 2026 COLA be even smaller?
Yes, if inflation stays low, the 2026 COLA could be around 2.2%.
How does lower inflation benefit retirees?
Lower inflation can lead to lower interest rates, making it easier to borrow and refinance debt.
