In just two months, the Social Security Administration will announce the Social Security cost-of-living adjustment (COLA) for 2025. Below, we’ll answer some basic questions about the Social Security COLA and what it means for you.
What Is The Social Security COLA?
Social Security’s COLA increases the benefits paid to retirees and beneficiaries each year to help them maintain their buying power and protect against inflation. The COLA for 2025 will be announced in October 2024 and will be effective for Social Security checks that will be paid in January 2025.
How Is The COLA Determined?
The 2025 COLA is based on the percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2023 to the third quarter of 2024.
What Is The Projection For The 2025 Social Security COLA?
A recent AARP article quotes one economist’s estimate that the 2025 COLA will range from 2.6% to 2.9%, although it quotes another economist who projected a COLA that ranged from 2.75% to 3.25%. Keep in mind, however, that these are just their best guesses, based on the change in the CPI-W so far this year and on current trends. The actual COLA won’t be determined until after September 30 when the actual CPI-W data is compiled.
How Much Of An Increase/Decrease Is This From 2024?
The Social Security COLA for 2024 was 3.2%, following a large 8.7% COLA for 2023. Depending on which of the above projections is correct, the 2025 COLA will either be slightly smaller or just about equal to the 2024 COLA.
What Does The COLA Rate Mean For Current Retirees?
The 2025 COLA will help the income current retirees and beneficiaries receive from Social Security keep pace with inflation. However, there’s no guarantee that individual retirees’ spending power will be protected. The CPI-W is measured using a theoretical basket of goods and services for urban and clerical workers, applied nationally. Differences between the CPI-W as measured and inflation in the specific goods and services that you buy will depend on the actual items you spend money on and where you live.
The CPI-W has often been criticized as too low for retirees, who typically spend more money on health care compared to workers. As a result, retirees are more vulnerable to increases in the cost of health care, which has recently increased faster than other goods and services.
It would be wise for retirees and beneficiaries to monitor inflation in the items they buy and have some control over and then take protective action if possible. One example of this classic strategy has been expressed as follows: If the price of beef increases too much, switch to chicken.
Another strategy for retirees who are looking to protect their assets would be to invest some savings in the stock market, which historically has often appreciated faster than inflation. However, there’s no guarantee this will happen, as the stock market can also decrease over time.
How Is The COLA Applied for Pre-retirees?
In case you were wondering how your Social Security benefits are protected against inflation before you retire, here are some basic features:
- Your benefits are calculated with a formula that uses a 35-year average of your earnings. The higher your earnings, the higher your calculated benefit will be. When the Social Security Administration calculates this average, it adjusts or indexes each year’s earnings to account for changes in average wages since the year you received those earnings.
- Once you attain age 62, your benefits are adjusted for the COLA, even if you haven’t started your benefits yet.
What Does The COLA Mean For Those Preparing For Retirement?
Pre-retirees will want to explore strategies that help protect them against inflation. These strategies include:
- Delaying the start of your Social Security benefits to increase the monthly check that’s adjusted for the COLA.
- Investing savings in the stock market to help keep up with inflation.
- Examining the goods and services you’ll buy in retirement and consider ways to reduce your vulnerability to inflation. For example, the fact that health care costs typically increase faster than other goods and services might serve as motivation to take steps to improve your health now. Or you might want to study your choices under Medicare that could minimize your vulnerability to health care costs.
- Another possibility is to closely consider the type of home and community that would be best for your retirement years, with an eye toward reducing your costs and vulnerability to inflation. For example, can you select a home and community that reduces your maintenance, utilities, and transportation costs?
Social Security benefits are the bedrock of financial security for most retirees. Because of that, you’ll want to learn how you can maximize the money you’ll receive from Social Security over your lifetime. It might seem complicated, but hang in there and keep on learning!