If you’re a Social Security beneficiary, you’ll be glad to know that a cost-of-living adjustment (COLA) will slightly increase your benefits in 2025. However, the increase will be smaller than previous years, which might come as a surprise. For example, while the COLA adjustment was 3.2% in 2024 and reached a notable 8.7% in 2023, this year’s increase will be more modest.
The Social Security Administration has announced that the COLA for 2025 will be 2.5%, meaning beneficiaries can expect an average monthly increase of about $50 in their payments. This adjustment aims to help retirees and other beneficiaries manage rising costs for essential goods and services, though its impact might not fully cover the broad rise in living expenses as inflation continues to affect different aspects of everyday life.
Small increase in Social Security benefits for 2025
Social Security will apply this adjustment during the final payment cycle of the year. As a result, the increase will be reflected in December 2024 payments, set to be disbursed in January 2025. This measure also covers federal SSI (Supplemental Security Income) payments, which will increase by the same 2.5% starting in January 2025.
How the COLA adjustment is calculated
To determine the COLA, the Social Security Administration relies on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), assessing price changes during the third quarter of each year, from July through September.
This index captures the annual increase in overall prices compared to the previous year’s third quarter. While the CPI-W tracks general inflation, it may not perfectly align with the actual costs retirees face, as it focuses on spending habits of active, working individuals rather than retirees.
Why COLA doesn’t always reflect the real inflation for retirees
One notable criticism of the COLA calculation is its reliance on the CPI-W, an index that doesn’t accurately represent the spending patterns of retirees, who typically allocate a more significant portion of their income to healthcare.
This index measures inflation based on the expenses of workers under 62 years of age, which doesn’t necessarily match the spending habits of retired populations. Retirees often spend a larger portion of their income on healthcare, an area where costs have been rising consistently faster than the general inflation rate.
Impact of medical costs on retirees
Medical costs have been increasing at a rate beyond general inflation, with medical services rising by 3.6% and hospital services climbing by 4.5% in the past year, compared to an overall inflation rate of 2.4%. While younger individuals might dedicate around 7% of their budgets to medical expenses, older adults may spend 15% or more of their income on healthcare.
As a result, even with the COLA adjustment, many retirees find their income doesn’t quite keep pace with rising healthcare expenses and other costs.
Though any increase in benefits is generally welcome, a 2.5% adjustment may fall short of the real rise in living costs, especially for those who rely heavily on Social Security benefits. The moderate increase in the adjustment reflects the slowdown in general inflation, but certain sectors, like healthcare, continue to see above-average price hikes, challenging many retirees’ ability to manage costs adequately.
Outlook for the coming years
Social Security will likely continue to review and adjust the COLA annually, responding to the evolving economic landscape. While this year’s increase in Social Security benefits may not be as large as some had hoped, it aims to provide a modest level of relief to beneficiaries.
Looking ahead, there may be discussions about adjusting the COLA calculation to better mirror retirees’ spending patterns, particularly in healthcare costs.
In conclusion, while the 2025 COLA increase is smaller compared to recent years, it still serves as a support to help beneficiaries maintain their purchasing power amid shifts in the prices of essential goods and services.
