In recent days, the Social Security Administration has issued some bad news to retired workers in the United States. Social Security’s annual cost-of-living adjustment (COLA) is intended to provide some relief to seniors when inflation raises the cost of goods and services.
Unfortunately, the 2025 COLA will be the lowest in recent memory, and it will not be sufficient to protect against cost increases entirely. What retirees should know about the most recent change in COLA calculations and how it will affect them in February is provided here.
Bad news for retirees regarding COLA changes this month
Since 1975, Social Security benefits have been adjusted annually to account for inflation using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
This index, which focuses on products purchased by seniors, tracks the prices of a wide range of goods and services, including housing, food, and transportation. The adjustment is intended to ensure that retiree benefits remain competitive with the rising cost of living.
The methodology compares the CPI-W for the current year’s third quarter (July-September) to the same period last year. Social Security benefits are then adjusted to reflect the percentage increase.
When the CPI-W inflation rate for the third quarter of 2024 was 2.5% in 2025, retiree payments increased at the same rate as in January. This may appear to be a positive adjustment, but it conceals a more serious issue that many retirees will soon face.
Reaccelerating inflation reduces purchasing power
A 2.5% cost-of-living adjustment increase may appear reasonable, but given the rate of inflation, it is inadequate. The CPI-W increased from 2.2% in September to 2.8% in December, indicating a recent acceleration in inflation.
Because the COLA for 2025 was calculated using data from July to September, this inflation increase is problematic. As a result, the COLA failed to adequately reflect inflationary pressures in the latter half of 2024.
This implies that retirees will have lower purchasing power than expected in real life. This implies that even with the COLA increase, February’s spending will appear higher than usual. Even with a 2.5% COLA for 2025, full-year CPI-W inflation in 2024 is likely to be closer to 2.9%.
This disparity indicates an adjustment deficiency, resulting in a net reduction in retiree purchasing power. In 2024, inflation was already outpacing the COLA, and it appears that the 2025 adjustment will not be sufficient to catch up.
This is not a one-time problem. There was a similar disparity the previous year. Despite CPI-W inflation of 3.8% in 2023, Social Security benefits increased by only 3.2%. Pensioners’ benefits should have increased by 6.8% over the previous two years to keep up with inflation.
They only received 5.8% instead. Because of this disparity, the average retiree earning $1,905 per month loses an additional $228 per year. Even though inflation may fall in some years, the current upward trend is concerning, especially for retirees who rely on Social Security payments to cover their living expenses. When inflation resumes, as it has in recent months, the adjustments are insufficient to protect retirees’ savings.
COLA is exacerbated by the fact that Social Security adjustments are based on inflation rather than predicting it. Retirees never quite catch up with inflation, especially in years when it is high and increasing. As a result, their purchasing power gradually declines. Because the cost of living continues to rise, retirees will need to find new ways to supplement their income by 2025.
Selling stocks, withdrawing from savings, or looking for other investment options such as money market funds and high-yield savings accounts, which are currently offering attractive interest rates, are all possible ways to accomplish this. While they will not completely eliminate the deficit caused by insufficient COLAs, these strategies can alleviate some of the financial burden.
