Social Security is an important source of income for millions of retired Americans today. And those who depend on those monthly benefits to pay the bills are no doubt eager to know what their 2025 cost-of-living adjustment (COLA) will amount to.
Unfortunately, that information won't become available until October. That's because Social Security COLAs are based on inflation data from the entire third quarter of the year, which we're still clearly in the midst of.
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But based on what we know so far, it's looking like Social Security recipients are headed for disappointment in the context of 2025's COLA. Here are a couple of key reasons why.
1. The most recent COLA estimate is lower than previous ones
In July, the nonpartisan Senior Citizens League projected that 2025's Social Security COLA would amount to 2.63%. But in light of July's inflation reading, the group has since revised its projection downward to 2.57%. That's considerably lower than the 3.2% COLA Social Security recipients got at the start of 2024.
Of course, it's worth noting that a smaller Social Security COLA is indicative of cooling inflation. And a slower pace of inflation could provide retirees with a world of financial relief. But still, given the choice, most seniors would probably rather get a larger Social Security raise than a smaller one.
2. COLAs have historically failed to keep up with inflation
There's a chance that 2025's Social Security COLA estimate will be revised upward next month, and that next year's raise ultimately comes in higher than the current 2.57% projection. But even if that happens, 2025's COLA most likely won't be enough to make it possible for beneficiaries to maintain their buying power. And the reason for this is that Social Security COLAs have long failed seniors in this regard.
Between 2000 and 2023, seniors on Social Security lost an astounding 36% of their buying power, per the Senior Citizens League. And that's due to a flaw in the way Social Security COLAs are calculated.
COLAs are determined by measuring changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But the CPI-W does not do a great job of capturing the costs that seniors on Social Security tend to face. And it's not exactly a stretch to figure that the expenses that are most common to urban wage earners may not match the expenses that Social Security recipients tend to bear.
Advocates have proposed a change in the way Social Security COLAs are calculated by using a CPI-E, or Consumer Price Index for the Elderly. But until a new system is adopted, COLAs will likely continue to disappoint. And 2025's raise will probably be no exception.
Don't set yourself up to become reliant on Social Security COLAs
It's unfortunate that a smaller COLA in 2025 will hurt a lot of retirees. If you're still working, aim to set yourself up with enough non-Social Security income that a smaller raise at any given time won't be such a problem.
Steadily funding an IRA or 401(k) plan is a great way to amass a nice nest egg. And even if you've gotten a later start, you can always play catch-up by making spending changes to free up cash for your long-term savings.
Another strategy you may want to employ if you're not on Social Security yet is to delay your claim as long as possible -- meaning, until your 70th birthday. Doing so could raise your monthly benefits by 24% or a bit more, depending on your full retirement age. And if you're able to start out with a larger monthly Social Security check to begin with, any COLA that comes down the pike is apt to put more money in your pocket.
