Social Security's Cost-of-Living Adjustment (COLA) in 2025 Might Be Even Smaller Than the Raise in 2024
Social Security recipients get annual cost-of-living adjustments (COLAs) to help protect the buying power of benefits from inflation. Fallout from the pandemic led to particularly high inflation in recent years, so much so that retired workers received an 8.7% COLA in 2023, one of the largest raises in program history.
But benefits increased just 3.2% in 2024 as consumer price increases moderated, and the 2025 COLA could be even smaller.
Policy analyst Mary Johnson of The Senior Citizens League (TSCL) recently revised her 2025 COLA forecast upward to 2.4% after inflation reaccelerated in February. Her estimate now matches the forecast from the Social Security Board of Trustees, and it roughly aligns with the 2.5% COLA projected by the Congressional Budget Office. But Social Security recipients might be unhappy with either prediction.
Nearly three-quarters of senior households say expenses increased more than 3.2% last year, meaning the 2024 cost-of-living increase will not completely offset rising prices, according to a survey from TSCL. Similarly, 58% of retirees are concerned they will need to make significant spending cuts to keep pace with inflation, according to the 2023 Retirement Confidence Survey, which is conducted annually by the Employee Benefit Research Institute.
In light of those statistics, a 2025 COLA of 2.4% to 2.5% probably won't provide much financial relief. But readers should bear two things in mind. First, the Social Security Administration cannot calculate the official COLA for several months, so the current forecasts are subject to change. Second, even if the current forecasts are accurate, there is still a silver lining related to the impending insolvency of the Social Security trust fund, as you'll learn below.
The official COLA for 2025 is months away
Social Security benefits get an annual COLA based on how inflation changes from one year to the next, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W tracks prices across more than 200 spending categories from the perspective of hourly workers.
The COLA calculation is straightforward: The third-quarter CPI-W (July through September) from the current year is compared to the third-quarter CPI-W from the previous year. The percent increase (if any) becomes the COLA in the following year. For instance, the third-quarter CPI-W increased 3.2% in 2023, so Social Security benefits got a 3.2% COLA in 2024.
That means the data required to determine the 2025 COLA will not be available until the Labor Department publishes the September CPI-W report, which typically happens in mid-October. Current COLA estimates could end up being inaccurate.
The silver lining to a smaller COLA in 2025
If current forecasts prove correct and the 2025 COLA lands somewhere around 2.5%, there is still a small silver lining for retired workers and other Social Security beneficiaries. As mentioned, the Board of Trustees anticipates a 2025 COLA of 2.5%. It used that figure in its latest financial analysis of the Social Security trust funds, which concluded that benefit cuts could be necessary in 2034.
Congress still has time to find a solution that avoids benefit cuts, and there is no chance the Social Security program will stop paying benefits altogether. But if the 2025 COLA is much higher than 2.5%, it could accelerate the timeline to trust fund insolvency and bring potential benefit cuts even closer.
In fact, that happened when Social Security benefits received an 8.7% COLA in 2023. The Board of Trustees had previously estimated that benefit cuts would be necessary in 2035 but moved its estimate forward by a full year due to the much higher than expected COLA. In that context, a smaller COLA in 2025 is not all bad.
The $22,924 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
View the "Social Security secrets"
The Motley Fool has a disclosure policy.
Social Security's Cost-of-Living Adjustment (COLA) in 2025 Might Be Even Smaller Than the Raise in 2024 was originally published by The Motley Fool
