Next year's COLA may not go as far as you think.
Millions of retirees depend on Social Security to make ends meet. Benefits are a major source of income for 60% of current retirees, according to a 2024 poll from Gallup, with an additional 28% of retirees relying on their benefits as a minor income source.
It's no surprise, then, that many retirees are eagerly awaiting the annual cost-of-living adjustment (COLA) announcement. The COLA is designed to help Social Security keep up with inflation, and beneficiaries can sometimes collect hundreds or even thousands more per year.
While some experts are already estimating the 2025 COLA based on recent inflation data (The Senior Citizen League currently projects a 2.63% COLA for next year), we won't know the official figure until the Social Security Administration makes its announcement in October.
Receiving larger checks is always exciting, especially as many retirees continue to struggle with rising costs. However, the COLA may not make as much of a difference going forward. Here's why.
Social Security is facing a bigger problem
Despite annual COLAs, Social Security is failing to keep up with inflation. In fact, according to a 2023 study from The Senior Citizens League, benefits have lost 36% of their buying power since 2000. The report also revealed that in order to maintain the same buying power as in 2000, current beneficiaries would need an extra $516.70 per month.
For context, the average retired worker collects around $1,900 per month, as of June 2024. If the 2025 COLA does land at around 2.6% as is currently projected, that would only amount to around $49 more per month for the average retiree.
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For many retirees, the COLA won't even come close to making up for rising costs. A separate study from The Senior Citizens League found that two-thirds of seniors report their monthly costs increasing by 10% between 2022 and 2023. While the 2023 COLA was the highest in four decades, it only landed at 8.7%. In other words, even record-breaking COLAs haven't been enough to successfully fight inflation.
Finally, Medicare Part B premiums can take a bite out of the COLA. These premiums (which are deducted from retirees' monthly Social Security checks) increased by $9.80 per month in 2024. If the COLA only increases the average retiree's benefit by roughly $50 per month, rising premiums can take a big chunk of that raise.
Now, this doesn't mean that the COLAs don't matter at all. Every dollar counts in retirement, especially if you're relying heavily on your benefits. But Social Security has a shaky history with inflation, so if you're depending on the COLA to substantially increase your benefits, you may end up disappointed.
Is there a solution for seniors?
Some experts are pushing for the Social Security Administration to revamp its calculations for the COLA so that it better prioritizes the needs of older adults.
The current calculations are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W tracks changes in prices, but it's focused primarily on costs that affect workers. This index may underestimate the impact of rising costs on retirees, as it's not as heavily weighted toward expenses like housing and healthcare -- two costs that have skyrocketed in recent years.
There is another index that focuses specifically on seniors: the Consumer Price Index for the Elderly (CPI-E). If the Social Security Administration were to calculate the COLA based on the CPI-E, it would likely result in larger adjustments each year.
However, with the program's current financial challenges, the Social Security Administration may be hesitant to increase payments if it means depleting its trust funds even more quickly. Until that problem is resolved, it's unlikely retirees will see COLAs large enough to make a major difference with rising costs.
What can you do right now?
If you're already retired, there may not be much you can do to reduce your dependence on Social Security. But you can keep your expectations in check for how far the COLA increases will go. While these annual raises can help make retirement more affordable, they may not make as much of a difference as many people think.
If you're not yet retired or are able to reduce how much you rely on your benefits, that could be a smart move. Perhaps that means delaying retirement by a year or two to save more, or maybe you pick up a source of passive income. You could also delay claiming Social Security to earn larger checks each month.
Sometimes, the best thing you can do is to simply stay aware of what's going on with Social Security. When you have realistic expectations about how much (or little) the COLA will affect your finances, you can take steps to better prepare for the future.
