The Social Security Administration has announced a very modest increase in Social Security benefits for 2025. Starting next January, your Social Security paycheck will reflect a cost-of-living adjustment (COLA) of just 2.5%. This small increase is due to a steady decline in inflation and lower prices for some goods and services. However, the 2.5% figure is a much larger decline than the 8.7% hike recorded in 2023, when inflation was soaring.
2.5% COLA is close to the average increase over the past 20 years
The 2.5% increase is only slightly lower than the 2.6% average increase over the past 20 years, but significantly lower than the long-term average. The average COLA over the past 47 years is calculated to be 3.7%.
The relatively modest rate of increase in 2025 may seem insufficient, especially if prices are just beginning to stabilize.
Increase in COLA at high and low concentrations
Since 1975, when COLAs were introduced, the highest Social Security COLA was 14.3% in 1980, which was an anomaly. The only other times when the COLA was 8% or higher were 1975 (8%), 1979 (9.9%), 1981 (11.2%), and 2023 (8.7%).
And what’s interesting is that there were three years (2010, 2011, and 2016) where the growth rate was 0%.
Is a 2.5% increase enough to maintain quality of life?
This year’s COLA may be helpful. However, according to recent data from the advocacy group Senior Citizens League (TSCL), 80% of senior households surveyed in 2024 will have lower monthly budgets for necessities like food, housing, and prescription drugs than they did in the past 12 years. It was found that there was an increase compared to the 63% say they’re worried they won’t have enough income to cover these basic expenses in the coming months.
Also, because of the way COLAs are calculated (see below), previous increases did not keep up with increases in Medicare and other retiree costs.
“Ensuring seniors have adequate food and shelter with dignity is a key reason we advocate for a minimum 3% COLA,” said Shannon Benton, executive director of TSCL. “According to TSCL research, approximately two-thirds of seniors rely on Social Security for more than half of their monthly income, and 28% are completely dependent on Social Security.”
The actual impact of COLA increases will be determined by Medicare costs.
Over the past 21 years, COLA has increased Social Security benefits by 55 percent, but housing costs have increased by nearly 118 percent and health care costs by 145 percent over the same period, according to a 2022 study by Mary Johnson, an analyst at the Seniors Alliance. increased.
And this year is no exception. Out-of-pocket medical costs for people 65 and older increased by 5% in 2024, according to Fidelity’s annual Health Care Cost Survey. This results in an increase in medical costs that is twice the COLA.
The difference can also be large, as medical costs account for a higher proportion of the elderly’s budget.
How much will this COLA increase my Social Security salary?
Social Security benefits vary widely depending on when benefits begin and your income level during your working life. But on average, this spike increases retirees’ monthly payments by more than $50.
of Social Security Administration announced that they will be notified by mail of the new benefit amount starting in early December. If you have personal items, my social security If you created an account before November 14th, you can view your COLA notice online.
Is there an upside to a small increase in COLA?
It may seem like a large increase in Social Security benefits is good news and a small increase is bad news. But the pay increases are meant to help retirees keep pace with inflation. And inflation isn’t good news for anyone.
It’s time to update your retirement planning data
It’s a good idea to keep your retirement plan updated as your financial situation changes. This news could lead to updates to Social Security benefits and inflation projections.
Social security benefit amount
If you’ve already started Social Security, we recommend updating your COLA projections in the Boldin Retirement Planner.
inflation
To account for declining inflation, everyone should evaluate assumptions for Social Security COLA, general inflation, home price increases, and medical inflation in the Boldin Retirement Planner.
How to Calculate the Social Security Cost of Living Adjustment (COLA)
of First social security COLA increase It was 1950. Congressional legislation increased benefits by 77%. Two further acts of Congress were enacted during the 1950s, and the total increase reached 125% of its original level by the end of the decade. From 1950 to 1975, the COLA was increased nine times by single act of Congress.
In 1973, a law was passed that provided: social security Benefits track inflation, and automatic annual COLA increases first occurred in 1975. social security law The COLA is specified to be determined based on increases in the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W) (depressions are not used).
The Social Security Administration uses average CPI-W data from July, August, and September of the previous year and compares it to the same period this year. The percentage change between the two numbers is the COLA increase.
Does the way Social Security COLA is calculated put retirees at a disadvantage?
As its name suggests, the CPI-W measures the increase in the cost of the types of goods that urban workers typically purchase. The problem with applying this measure to Social Security is that retired seniors spend their money very differently than most workers. Most notably, older adults spend significantly more on health care than the general population.
To make matters worse, health care costs typically increase at a much faster pace than most other goods and services. According to various metrics, health care costs have increased by 3% to 12% annually over the past decade. And older adults spend more of their income on health care than the average worker.
According to the Alliance on Seniors, “With Social Security benefit growth subdued, there is not only an issue of continued benefit levels for retirees, but also concerns that COLAs will not cover increased Part B premiums for many beneficiaries. If this is not enough, there will also be problems with the Medicare budget.”
Alternatives to the CPI-W method of calculating Social Security COLA have been proposed, including: R-CPI-E “Retirement Price Index for Older Americans.” This method of calculating inflation, specifically for people 62 and older, was mandated by the Older Americans Act of 1987, but has never been used to update Social Security COLAs.
How to make sure you have enough retirement funds
Social Security is designed only to replace a portion of your retirement income. It is almost (though not completely) impossible to live on Social Security alone.
Here are four things you should do to ensure you have enough retirement income regardless of Social Security increases in 2022.
1. Calculate all retirement income sources
You need to think about how you will withdraw your savings, how you will earn them, and whether you will have a pension, passive income, or a job in retirement.
2. Estimate your retirement benefits
How will your spending change after you retire?
3. Assessing inflation
President Ronald Reagan said, “Inflation is as violent as a mugger, as terrifying as an armed robber, and as dangerous as a murderer.” And it’s true. Inflation makes the money you have worthless. This is one reason why correctly predicting and calculating inflation is so important to your future financial security.
4. Protect yourself from other risks
Inflation isn’t the only unknown factor that can wreak havoc on your retirement finances. You also need to plan for things like longevity, medical emergencies, and natural disasters.
Incorporate Social Security Income Projections into Retirement Planning
Sound complicated? It doesn’t have to be.
Boldin Planner is an easy-to-use yet highly detailed tool that will tell you if you have enough retirement savings. You can set different levels of spending and income for different stages of retirement.
You can also set your own estimated inflation rate. You can also specify one for general expenses and one for housing, medical expenses, etc. Try different interest rates in each category to see how much they affect your financial situation in retirement.
