2025 Cost-of-Living Adjustment: 2 Important Factors Retirees Need to Consider with New Check Amounts

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Social Security remains a crucial source of income for millions of retired Americans. Many retirees, reliant on these monthly benefits to cover their expenses, are keenly anticipating the announcement of the 2025 cost-of-living adjustment (COLA).

However, this eagerly awaited information will not be available until October. The reason for this delay is that Social Security COLAs are determined based on inflation data collected throughout the entire third quarter of the year, which is still ongoing.

Despite the lack of official data, there are indications that Social Security beneficiaries might face disappointment when it comes to the 2025 adjustment. Two primary factors contribute to this concern.

Reasons why seniors are worried about the COLA

First, the latest COLA estimate suggests a lower increase than previously anticipated. In July, the nonpartisan senior advocacy group The Senior Citizens League projected a 2.63% increase in Social Security benefits for 2025. However, following the inflation reading for July, the group adjusted its projection downward to 2.57%. This revised estimate is significantly lower than the 3.2% increase that Social Security recipients received at the start of 2024.

While a smaller COLA often reflects a slowdown in inflation, which could ease financial pressures for retirees, many seniors would still prefer a larger increase in their Social Security benefits. The preference for a more substantial raise is understandable, as it would provide greater financial security in covering rising living costs.

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Second, there is a historical precedent for COLAs not keeping pace with inflation. Although it is possible that the 2025 COLA estimate could be revised upward next month, and the actual raise might exceed the current projection of 2.57%, it is unlikely to be sufficient to maintain beneficiaries’ purchasing power. The reality is that Social Security COLAs have historically fallen short in this regard.

New Impact Through Sources

From 2000 to 2023, seniors on Social Security experienced a staggering 36% reduction in their purchasing power, according to the Senior Citizens League. This decline is largely attributed to a flaw in the way Social Security COLAs are calculated.

The COLAs are determined by tracking changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, the CPI-W does not accurately capture the specific costs that seniors on Social Security typically face as the expenses common to urban wage earners may not align with those of Social Security recipients, leading to a disconnect between the COLA and the actual cost of living for retirees.

To address this issue, some advocates have proposed changing the calculation method for Social Security COLAs by using a different index, known as the Consumer Price Index for the Elderly (CPI-E). This alternative index would better reflect the spending patterns of older Americans. However, until such a change is implemented, Social Security COLAs are likely to continue disappointing retirees, and the 2025 raise may be no exception.

Given the potential for a smaller COLA in 2025 to negatively impact many retirees, it is essential for those still in the workforce to prepare for retirement with additional sources of income beyond Social Security. Relying solely on Social Security benefits can be risky, especially when the adjustment may not keep up with inflation.

One effective way to build a more secure financial future is to consistently contribute to an Individual Retirement Account (IRA) or a 401(k) plan. By steadily funding these retirement accounts, individuals can accumulate a substantial nest egg over time.

Another strategy to consider, particularly for those who have not yet claimed Social Security, is delaying the start of benefits until reaching the age of 70. By postponing the claim, retirees can increase their monthly benefits by 24% or more, depending on their full retirement age. Starting with a larger monthly benefit can provide a significant financial cushion, making any future COLA increases more impactful.