Every year, millions of Social Security recipients eagerly await October, as this is when they learn how much their benefits will increase. This change, known as the cost-of-living adjustment (COLA), is released by the Social Security Administration (SSA). The COLA determines how much Social Security payments are raised in response to inflation, with the goal of helping beneficiaries maintain their purchasing power amidst rising prices.
In 2024, the COLA adjustment was set at 3.2%. This figure has been a point of contention for many, as it was perceived to be lower than the actual rate of inflation, meaning that the increase in benefits has not fully covered the rising costs that many Social Security recipients face. Part of why this might be is because inflation surpassed the increase almost as soon as it was implemented, leaving many facing mounting costs and with no way of covering them.
Over the last five years, the only adjustment that exceeded inflation was in 2023, when the COLA reached 8.7%, a reflection of a particularly high-inflation period in the United States. According to The Senior Citizens League, a prominent advocacy organization, this was a rare instance when the increase in Social Security payments was able to keep pace with the rapidly rising prices.
The impact of the COLA on Social Security
Looking ahead to 2025, speculation is already underway regarding what the COLA might be. The annual adjustment is based on the percentage change in an inflation index, specifically the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is measured by comparing the average inflation from the third quarter of the current year with the same period from the previous year. The final figure is not announced until October, but predictions can be made in advance by looking at inflation trends earlier in the year.
As of June 2024, preliminary forecasts suggest that the COLA for 2025 might be around 2.6%, according to Shannon Benton, executive director of The Senior Citizens League. However, it is important to note that this figure is still subject to change, as the official calculation will depend on inflation data from July through September. If this 2.6% estimate holds true, many seniors may find themselves in a challenging financial position, as this increase is likely to not fully account for their rising living expenses.
Benton emphasized that this shortfall is particularly concerning because when COLA increases fall short of inflation, the gap in coverage accumulates over time, putting additional strain on beneficiaries. “We’re hearing that household costs rose faster than the COLA last year, with food and housing leading the way,” Benton said. The implication is clear: even with the 2024 increase, many seniors are finding that their Social Security payments are not enough to cover essential expenses like groceries and rent. As a result, some older adults have been forced to draw from their retirement savings more quickly than anticipated, or worse, to rely on credit cards, leading to accumulating debt.
For context, the anticipated 2.6% adjustment for 2025 is nearly aligned with the latest inflation data available as of July 2024. At that point, inflation in the U.S. had fallen to 2.5% on an annual basis. This marked an improvement from earlier estimates, which had pegged inflation at 2.9%. Although a 2.5% inflation rate is a positive development, particularly given that inflation had been much higher in the recent past, it still exceeds the Federal Reserve’s long-term goal of maintaining inflation at 2%.
The anticipated 2.6% increase for 2025, if it holds, would be intended to keep Social Security benefits in line with inflation, but it may not be sufficient to address the ongoing financial strain many beneficiaries experience. With each year that inflation exceeds the COLA adjustment, the gap widens, leaving seniors with fewer resources to meet their needs. This, in turn, could push more people to tap into their savings or accumulate debt, exacerbating the financial insecurity faced by millions of older Americans.
