2025 Cost of Living Adjustment Update – Two Concerns for Retirees Regarding Increased Checks

Social Security remains a lifeline for millions of retired Americans, providing them with crucial monthly income. With many retirees depending on these benefits to cover their essential expenses, the annual cost-of-living adjustment (COLA) is a significant event.

This adjustment helps Social Security keep pace with inflation, ensuring that beneficiaries maintain their purchasing power. However, the eagerly awaited 2025 COLA announcement, expected in October, might bring disappointment to many seniors.

Delay

The reason why the 2025 COLA is still unknown is that it’s based on inflation data from the entire third quarter of the year, which runs from July through September. Only after the government has collected and analyzed this data can the final COLA be determined and announced. However, even without the official numbers, early estimates suggest that retirees might not be happy with the outcome.

Estimates

The Senior Citizens League, a nonpartisan senior advocacy group, initially estimated a 2.63% increase in Social Security benefits for 2025. But after analyzing the inflation data from July, they revised their estimate downward to 2.57%. This is a noticeable drop from the 3.2% increase that Social Security beneficiaries received at the start of 2024.

While a smaller COLA indicates slower inflation, which might seem like good news, many retirees would prefer a larger increase in their benefits. A more substantial COLA would help them better manage rising living costs, giving them more financial security in retirement.

Historical Precedent

The concern about a lower-than-expected COLA isn’t just about 2025; it reflects a broader issue. Historically, Social Security COLAs have struggled to keep up with the actual cost of living for seniors. From 2000 to 2023, the purchasing power of Social Security benefits dropped by a staggering 36%, according to The Senior Citizens League. This reduction is due to a flaw in how COLAs are calculated.

Calculation Flaws

The Social Security Administration calculates COLAs using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The problem is that the CPI-W doesn’t accurately reflect the spending patterns of seniors, who often face higher healthcare costs and other expenses not adequately captured by this index.

As a result, even when Social Security benefits are adjusted for inflation, the increase often falls short of what retirees need to maintain their standard of living.

Alternative

Some experts and advocates have suggested that Social Security should use a different index to calculate COLAs, specifically the Consumer Price Index for the Elderly (CPI-E). The CPI-E is designed to reflect the spending habits of older Americans more accurately and could lead to larger, more realistic COLA increases. However, until such a change is made, Social Security COLAs are likely to continue disappointing retirees, and the 2025 raise may be no exception.

Preparing for Retirement

Given the likelihood of a modest COLA in 2025, it’s more important than ever for those still working to prepare for retirement by building additional income sources. Relying solely on Social Security can be risky, especially when the benefits may not keep up with inflation.

One effective strategy is to consistently contribute to retirement savings accounts like an Individual Retirement Account (IRA) or a 401(k) plan. Over time, these accounts can grow into a substantial nest egg, providing a financial cushion that Social Security alone might not offer.

For those who haven’t yet claimed their Social Security benefits, delaying the start of benefits until age 70 can be another smart move. By waiting, retirees can increase their monthly benefits by 24% or more, depending on their full retirement age. A higher starting benefit makes future COLA increases more impactful, helping to better manage rising costs.

In the end, while Social Security remains a vital part of retirement income, it’s clear that planning for additional sources of income is essential. With a lower COLA on the horizon, now is the time to take steps to secure a more comfortable and stable retirement.

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