Experts now believe Social Security is headed for a 2.6% COLA in 2025, which is bigger than expected, but retirees shouldn’t just excited.
In most years, Social Security recipients get a cost-of-living adjustment (COLA) to help protect their buying power. Prices of goods and services go up over time, and if benefits didn’t, seniors would be able to buy less each year with their retirement checks.
Recently, the Senior Citizens League (SCL), an advocacy group, revised its estimates of how much the COLA will be in 2025 and now predicts it will be larger than it originally projected.
A bigger raise might seem like great news, but the reality is that this is an unwelcome development because retirees could end up worse off in 2025. Here’s why.
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The bigger estimate was prompted by higher-than-expected inflation
The SCL had estimated in February 2024 that the 2025 COLA would be 1.75%, and it went up to 2.4% in March. Now, in April, the new estimate is 2.6%.
The SCL is adjusting its COLA estimates upward because of the data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the prices of a basket of goods and services.
Each year, the Social Security Administration assesses how much the CPI-W rose year over year. Specifically, data from the third quarter of the year is used in this calculation. In March, a year-over-year comparison showed prices are 3.5% higher, a bigger-than-anticipated jump.
So, while we’re not in the third quarter yet, the CPI-W data already available shows inflation is high enough to warrant a bigger COLA.
This could change if price increases slow by the third quarter, when next year’s COLA is set. But based on inflation trends, there’s reason to believe that cost hikes won’t ease and that retirees will get a bigger raise to help them maintain their buying power in 2025.
Is a bigger COLA good news?
Retirees aren’t effectively getting a raise; instead, their benefits are getting higher to help keep up with inflation. The idea is that without a Social Security COLA, the program doesn’t improve their life and instead won’t allow them to maintain their standard of living.
The problem is, most retirees have some money from outside Social Security. And those funds might be generated from investment or savings accounts that don’t offer automatic increases when inflation surges. Unless retirees are earning well above the high inflation rates, all of these other sources of funds won’t stretch as far. And this could leave retirees much worse off.
Ultimately, a COLA isn’t a raise but an adjustment to help reduce the impact inflation can have on a fixed income. A high COLA means inflation is also high, which is especially bad for seniors who likely have a lot of money in lower-risk investments that might not be producing great returns.
So Social Security recipients shouldn’t hope for a larger COLA in 2025 but instead wish that inflation trends turn around — even if their boost in benefits ends up being smaller than expected.
