In January of 2023, seniors on Social Security saw their benefits increase 8.7%. That cost-of-living adjustment, or COLA, was the largest one to arrive in decades. And it no doubt helped many seniors cope with rising expenses.
But last year's Social Security COLA was nowhere close to 8.7%, coming in at just 3.2%. And current estimates are putting 2025's Social Security COLA at just 2.63%.
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It begs the question: Was 2023's 8.7% COLA a true anomaly? Or is it possible that Social Security benefits will be eligible for a similar boost in the future?
A mega-sized COLA could happen in the future -- but probably not in the next few years
The 8.7% COLA Social Security recipients got in 2023 is actually not the program's largest one on record. The largest COLA to ever arrive was the 14.3% raise that came in 1981. And the following year, Social Security beneficiaries got an 11.2% increase.
If you're familiar with how Social Security COLAs are calculated, these numbers shouldn't actually surprise you. Social Security COLAs are based on inflation, so during periods when costs are rising rapidly, Social Security raises tend to be higher.
Anyone who was economically aware in the early 1980s knows that it was a period of rampant inflation. And so it makes sense that Social Security's COLAs were highest back then. (Those automatic COLAs only began to apply in 1975. Prior to that, Social Security COLAs were set by legislation.)
Similarly, inflation began to soar as the U.S. economy staged its recovery from the pandemic. Prices began rising rapidly in 2021, and inflation came to a head in 2022, leading to a very large Social Security COLA in 2023.
But because inflation cooled off in 2023, this year's Social Security COLA followed suit. And since inflation has been moderating this year, seniors may be looking at an even smaller increase in 2024.
Furthermore, because the Federal Reserve went to great lengths to cool inflation by raising interest rates repeatedly in 2022 and 2023, the central bank is unlikely to sit idly by if inflation reverses course in the near term. So if inflation starts to pick up again in 2025, the Fed will likely react by holding interest rates steady or even increasing them as needed rather than moving forward with expected cuts.
Either way, though, inflation is expected to continue to cool in the coming year or so -- not increase. The Fed just won't let it -- or at least not to a notable enough degree to lead to a larger-than-average Social Security COLA. So while it's possible for benefits to rise as much as 8.7% again in the future, that's unlikely in the next few years at least.
A smaller Social Security COLA is not necessarily a bad thing
Seniors may be wired to root for a large increase to their benefits year after year. But it's important to recognize that smaller Social Security COLAs aren't a terrible thing, and that an 8.7% increase actually isn't such a great thing.
A less generous Social Security raise means inflation is slowing down. So what seniors lose in terms of a larger benefit, they gain in terms of not paying as much for everyday essentials.
To flip this concept, an 8.7% Social Security COLA might give seniors more money to spend. But everything they're buying costs more, they're not gaining anything financially.
As such, don't despair if 2025's Social Security COLA ends up coming in lower than 2024's, and if it ends up being worlds away from the 8.7% raise that came through in 2023. At the end of the day, things basically even out, and seniors won't necessarily be any worse off than they are right now.
