The raise that arrives next year really won’t compare.
For seniors without much savings, Social Security can be a true financial lifeline. But because living costs have a way of rising from one year to the next, Social Security benefits are eligible for annual cost-of-living adjustments, or COLAs, to allow recipients to keep up with increasing expenses.
In 2024, Social Security benefits got a 3.2% COLA. For many seniors, though, that raise was disappointing, given that just a year earlier, they’d seen their benefits rise 8.7%.
There was a reason for that 8.7% boost, though. In 2022, inflation ran rampant, so 2023’s COLA was merely a means of helping seniors on Social Security maintain their buying power in light of it.
But believe it or not, that 8.7% COLA wasn’t nearly the highest Social Security COLA on record. There was a time when benefits were eligible for an even larger boost.
When COLAs were really huge
Prior to 1975, Social Security COLAs weren’t automatically calculated based on inflation data. Rather, they were set by legislation.
Social Security’s largest COLA on record came just years later, in 1981, when recipients saw their benefits rise 14.3%. The following year, Social Security’s COLA was 11.2%.
So, all told, there were a couple of years when Social Security paid a double-digit COLA. Of course, back then, inflation was absolutely battering consumers, so retirees on fixed incomes no doubt needed that relief, similar to how seniors needed a large COLA in 2023 following 2022’s soaring inflation.
Next year’s Social Security COLA won’t be so large
Social Security COLAs are calculated based on third-quarter inflation data. As such, it’s too early in the current year to determine what raise beneficiaries will get next year. But recent projections are calling for a COLA of 2.6%. And while that’s not the lowest Social Security COLA on record, it’s clearly a drop from 2024’s raise.
However, while it’s too soon to nail down a precise COLA for 2025, it’s not too soon to prepare for a smaller one. If you’re a current Social Security recipient, now’s a good time to look at your expenses to see whether there’s room to make some cuts to your retirement budget. That could mean shopping at discount grocers instead of your regular supermarket or downgrading to a less expensive streaming service for entertainment.
It could also be worth it to take advantage of the gig economy. There’s a world of opportunity to generate some amount of income as a retiree if you’re willing to work a few hours a week. Of course, this assumes your body is capable of that. If not, that clearly won’t be a choice.
All this advice also assumes you’re someone whose finances hinge heavily on Social Security COLAs. If you have a nice amount of savings or other income streams, a smaller COLA in 2025 — or any given year, for that matter — may not impact you all that much.
In fact, being in a position where you don’t have to worry about Social Security COLAs is really an optimal one as far as retirement is concerned. If you’re already a retiree, it may be a bit late to build up robust savings (though a part-time job could give you a decent cushion). But if you’re not yet at that point, contributing steadily to a 401(k) or IRA could put you in a place where not even a string of 0% Social Security COLAs will upend your finances in retirement.
