The 3.2% Social Security cost-of-living adjustment (COLA) seniors got in 2024 didn't provide the relief that many retirees were hoping for after years of high inflation. Unfortunately, the 2025 COLA probably won't help that much either. The latest projections from The Senior Citizens League (TSCL) put it at around 2.57%, though we won't know the real figure until October.
If retirees had it their way, the COLA would be much higher. In our recent survey on Social Security COLAs, 42% of respondents said they thought COLAs should be between 6% and 9%, while 36% said they should be 9% or more. I see the immediate benefits to seniors if this were the case, but I also see a major problem a few years down the road.
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Social Security's already facing a solvency crisis
Social Security is quickly draining its trust funds, which are essential to providing benefits to millions of retired and disabled workers and their families. The latest estimates suggest the trust funds will be depleted in 2035. At this time, the program would only be able to pay out 83% of scheduled benefits going forward, unless the government intervenes sooner.
People have been talking about possible solutions to this issue for years, but so far, no definite plan has emerged. It's likely that the government will take steps to ensure the program's future solvency, much as it did when Social Security faced a similar funding crisis in the early 1980s.
However, until this happens, introducing higher COLAs might not have the positive effect retirees hope for. In the short term, it would lead to significantly larger checks and a higher standard of living, especially for those depending heavily on their checks.
But it would also accelerate the date of trust fund depletion. This could lead to more substantial, longer-lasting benefit cuts for seniors if the government can't get a plan together fast enough.
The silver lining
This leaves retirees between a rock and a hard place. Low COLAs slowly erode their buying power over time, while high COLAs could lead to even more damaging benefit cuts. But all hope isn't lost.
For one, you'll still get some kind of benefit increase in 2025, even if it isn't what you'd hoped for. Once the government officially announces the COLA, you can begin to plan your budget for 2025. Estimate how much of your monthly expenses your checks will cover and come up with a plan to pay for the rest. This could involve personal savings, other government benefits, or income from a job.
You should also remember that Social Security could see larger COLAs in the future. Many people have called for the Social Security Administration to calculate COLAs based on the Consumer Price Index for the Elderly (CPI-E), rather than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) that it uses today. Data shows that this change would result in larger COLAs in most years.
There are no plans to make this shift yet, but it could happen when the government finally addresses Social Security's funding shortfall. Only time will tell. For now, we just have to take things day by day and keep an eye out for any future changes to the program.
