In less than two weeks, the new Cost of Living Adjustment (COLA) for Social Security will be announced. While many retirees are hopeful for a significant increase, the 2025 COLA is shaping up to be far less exciting than recent years. In fact, retirees may want to brace for a much smaller adjustment than they’ve seen in the past, as inflation has been largely contained by the Federal Reserve.
Over the past three years, retirees enjoyed an 18.8% total increase in their Social Security benefits thanks to large COLA hikes driven by high inflation. However, those days are likely behind us. With inflation under control, future COLA adjustments will be modest, and retirees should begin preparing for tighter times ahead.
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Inflation
The Social Security Administration calculates the annual COLA based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For 2025, the CPI-W values for July and August indicate a projected 2.6% increase, significantly lower than the previous years’ adjustments.
Inflation, which surged during the pandemic, has been curbed thanks to the Federal Reserve’s aggressive interest rate hikes. The recent announcement of a 50-basis point reduction in interest rates is a clear signal that the central bank feels inflation is under control. This reduction may help consumers borrow more affordably, but it also suggests that major COLA increases will no longer be necessary.
Energy
A major factor in the slowdown of inflation is the decrease in energy prices. Oil, which dropped below $70 per barrel, is down about 20% from a year ago. Lower oil prices have a ripple effect across many sectors, driving down the cost of goods and services. As energy prices continue to fall, inflation is expected to slow even further, which limits how much the COLA can increase.
In August, the CPI-W rose only 0.23%, suggesting that year-over-year inflation is decelerating. With energy prices stabilizing and inflation slowing, retirees shouldn’t expect a COLA much higher than the 2.6% currently projected.
Financial Planning
Looking beyond 2025, retirees may face even more financial challenges. The Federal Reserve’s inflation target is 2%, and its projections suggest that inflation will continue to decline. By 2026, inflation is expected to be around 2.2%, resulting in another small COLA increase.
Retirees who received an 8.7% adjustment in 2023 may find it difficult to adjust to these lower increases. Though smaller COLAs reflect lower inflation, they also mean less of a financial cushion against rising costs for necessities like electricity and groceries. Retirees will need to tighten their budgets and consider how to stretch their Social Security benefits further in the coming years.
2026
The Federal Reserve has projected that inflation will remain near 2.1% by the end of 2025, which would keep the 2026 COLA low, around 2.2%. This is not particularly surprising, as the economy has largely stabilized after years of turbulence. However, it is a reminder for retirees to take a proactive approach to their finances, especially since the COLA is backward-looking and doesn’t necessarily reflect the current costs retirees are facing.
The good news is that lower interest rates can provide some relief. With borrowing costs decreasing, retirees might find it easier to refinance mortgages or pay off other debts. This could offer some flexibility, even as the COLA adjustments fail to keep pace with certain rising expenses.
Interest
Though retirees might be frustrated by the smaller COLA adjustments, the Federal Reserve’s focus on controlling inflation should ultimately help stabilize the economy. Lower inflation leads to lower costs in many areas, allowing retirees to preserve more of their income for essential needs. That said, it’s important to remember that the COLA is a reaction to past inflation, not an indicator of future costs.
Retirees will need to balance their financial planning between adjusting to modest COLA increases and benefiting from an environment of lower interest rates and contained inflation. With the days of big Social Security increases likely over, smart budgeting will be key.
Though the upcoming COLA may feel disappointing, controlled inflation and decreasing interest rates should provide some relief. Retirees should stay vigilant about their finances, looking for ways to maximize their income and reduce expenses. By planning ahead, retirees can still maintain financial stability, even in the face of smaller Social Security adjustments.
FAQs
Will the 2025 COLA be lower than previous years?
Yes, the 2025 COLA is projected to be around 2.6%, much lower than recent years.
How does the COLA get calculated?
It’s based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Are lower oil prices affecting the COLA?
Yes, lower oil prices contribute to reduced inflation, which impacts the COLA.
Can retirees expect higher COLAs in 2026?
No, 2026’s COLA is projected to be around 2.2%, even lower than 2025.
Will lower interest rates help retirees?
Yes, lower interest rates make borrowing easier and may offer financial flexibility.
