For those who rely heavily on Social Security as their primary source of income, the prospect of a smaller cost-of-living adjustment (COLA) in 2025 is a worrying development. Each year, the COLA is designed to keep pace with inflation, helping retirees maintain their purchasing power.
However, forecasts for the upcoming year suggest that the adjustment will be lower than expected, potentially leaving many retirees with diminished ability to handle rising costs for essential goods and services.
Why is a lower COLA expected for social security in 2025?
The Social Security COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of the previous year. This index tracks changes in prices that affect consumers and is used to adjust benefits for retirees. In 2024, the COLA was set at 3.2%, offering moderate relief against the high inflation rates that spiked after the pandemic. However, for 2025, projections indicate that this adjustment will be significantly lower.
Estimates suggest the COLA for 2025 will hover around 2.6%, making it the smallest increase since 2021. This is largely due to inflation beginning to stabilize compared to the elevated levels seen in recent years. While a 2.6% increase is still notable from a historical perspective, it may fall short of offsetting the rising costs in areas that disproportionately affect retirees, such as healthcare and housing.
How will this lower COLA impact retirees?
For retirees, the annual Social Security adjustment is a lifeline to help preserve their quality of life, particularly as the prices of basic products and services continue to climb. Although overall inflation may be decreasing, retirees tend to experience higher inflation in critical areas such as healthcare and housing.
rising healthcare costs
One of the most significant challenges retirees face is the ongoing rise in healthcare costs. According to a survey by Schroders, retirees spend an average of 14% of their monthly income on prescription medications and other medical expenses. These costs tend to increase faster than general inflation, meaning a smaller COLA may not be enough to cover these growing expenses.
Additionally, the rising premiums for Medicare Part B, which covers outpatient medical care, could take up a significant portion of the COLA increase. The Medicare Trustees Board estimates that Part B premiums will rise by approximately 5.8% in 2025, bringing the monthly cost to around $185, up from $174.80 in 2024.
High-income surcharge impact (IRMAA)
For retirees with higher incomes, the Medicare high-income surcharge, known as the Income-Related Monthly Adjustment Amount (IRMAA), could further erode the benefits received from the COLA. This surcharge is based on retirees’ income from two years prior, meaning income from 2023 will determine how much they pay in Part B premiums in 2025. Retirees in this category could pay between $259 and $628.90 per month, according to analyses by Kiplinger.com.
What other factors influence the Cost-Of-Living Adjustment?
The 2025 COLA is influenced not only by the general rate of inflation but also by specific factors that disproportionately affect retirees. One key factor is the rising cost of housing, which has impacted both homeowners and renters. While retirees who own their homes may be shielded from rising rent costs, they are still subject to increases in property taxes and homeowners insurance, both of which have surged in recent years.
Furthermore, the costs of utilities, such as electricity, have also gone up. This is particularly relevant after the record-breaking heatwaves experienced last summer, which forced many older adults to spend more on air conditioning and other climate-related utilities.
COLA projections compared to previous years
Although the projected 2.6% COLA for 2025 is lower than the increases seen in the past two years, it remains higher than the pre-pandemic average. However, some experts, such as Mary Johnson, a Social Security and Medicare analyst, argue that the COLA still doesn’t adequately reflect the real costs retirees face, particularly in areas like healthcare and insurance.
