The Social Security Administration has revealed the cost-of-living adjustment (COLA) for 2025, leaving many retirees feeling disheartened. With a COLA of just 2.5%, this marks the smallest increase since 2021. Once implemented, the average retiree can expect an additional $50 in monthly benefits.
Despite this, the ongoing high expenses mean that these modest COLAs offer minimal relief in managing budgets for retirees. A survey conducted in 2024 indicated that many retirees feel the adjustments provide negligible support for their daily financial obligations. While the announcement regarding the 2025 COLA brings some optimism, it also raises important concerns.
The COLA is tied to inflation trends, and smaller adjustments suggest a deceleration in inflation. Ideally, lower costs should be advantageous to retirees compared to larger COLAs, which should be viewed positively. However, Social Security continues to struggle in keeping pace with escalating costs.
In reality, over the past five years, inflation has outstripped the COLA four times. The only year when the COLA surpassed the inflation rate was in 2023, with an unprecedented 8.7% increase, the highest in approximately four decades. This challenge may be connected to the methodology used in calculating the COLA.
The Social Security Administration (SSA) relies on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to track cost changes that predominantly affect workers. Many experts have suggested that the SSA should consider utilizing an alternative index, such as the CPI-E, which focuses on expenses affecting individuals aged 62 and older. Switching to the CPI-E could potentially result in higher COLAs that are more in line with the financial realities faced by retirees.
Retirees’ dissatisfaction with the 2025 adjustment
The continuous fiscal issues facing Social Security could reduce the likelihood of receiving more substantial COLAs in the foreseeable future. For many years, the Social Security program has been functioning with a deficit.
The revenue generated from payroll taxes and other streams has not adequately covered benefit payments; consequently, the SSA has relied on its trust funds to bridge the gap. According to the latest estimates from the SSA Board of Trustees, these funds are expected to be depleted by 2035. Once this occurs, incoming revenue will only account for about 83% of the benefits scheduled, leading to potential cuts of 17% for retirees in the next decade if timely legislative solutions are not found.
The more benefits the SSA dispenses, the quicker the trust funds will diminish, accelerating the onset of necessary cuts. While increasing COLAs would deliver immediate benefits to retirees, they could also instigate more significant challenges in the long run. Although the COLA and the future of Social Security may be beyond your control, there are steps you can take to enhance your savings and set realistic expectations regarding the viability of your benefits.
If you are in a position to continue working or can find alternative income sources, this could extend the lifespan of your savings. While not feasible for everyone, reducing dependency on benefits is advantageous as Social Security’s reliability may wane in the future. Additionally, if possible, trimming your spending can prolong the duration of your savings.
For those with retirement savings in vehicles like a 401(k) or an IRA, these funds can continue to grow as long as they stay invested. Even if you cannot augment your savings, leaving a larger portion of your nest egg untouched can yield benefits over time. Many retirees are already struggling to cover their expenses, and the lackluster COLA may not provide the necessary support.
By staying informed about the prospects for Social Security, you can take proactive measures to protect your savings.
