The Social Security Administration (SSA) is set to announce the 2025 Social Security Cost-of-Living Adjustment (COLA) on October 10, and there are concerns that it may disappoint many seniors who have been accustomed to generous increases in recent years. Over the past three years, retirees received significant COLAs, with increases of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. Nonetheless, initial projections indicate that retirees could expect only a modest 2.5% increase for 2025. While this news may not seem encouraging on the surface, experts suggest that a lower COLA may actually yield unexpected benefits for a segment of retirees, potentially enhancing their financial standing despite a smaller monthly check.
The way that the SSA calculates the COLA involves utilizing a specific subset of the Consumer Price Index (CPI), known as the CPI-W. This index reflects the cost of a basket of goods and services that represent the typical spending patterns of urban wage earners and clerical workers. The adjustments are determined by measuring the CPI-W increase during the third quarter of the year and comparing it to the previous year’s figures. Following this methodology, the official COLA will derive from the CPI-W reading for September. However, critics argue that this measure does not adequately represent the true expenses that seniors face, leading to recommendations that the SSA should consider the CPI-E, another measure that accounts for the specific spending habits of older Americans.
Advocates for changing the COLA measurement to better suit the realities faced by retirees assert that it could significantly aid households in maintaining their standards of living. Data from the Senior Citizens League points to a worrying trend where the purchasing power of those who began receiving benefits in 2010 has diminished by 20% since their first checks. Despite the perceived shortcomings of the CPI-W, the adjustments still provide a mechanism for compensating, to some extent, the impacts of inflation on benefits. This brings to light a somewhat paradoxical situation where a smaller COLA could ultimately assist many retirees, especially those with diversified income sources.
Not all retirees depend solely on Social Security for their financial needs. Many have supplemented their income through savings and investments in Individual Retirement Accounts (IRAs), 401(k)s, and other brokerage accounts. According to the 2022 Survey of Consumer Finances by the Federal Reserve, the median household with someone aged 62 or older had around $200,000 in various investment accounts. Given recent stock market performance, these accumulations may have grown significantly. Unlike Social Security benefits, which have automatic cost-of-living adjustments, these investments are inherently more volatile and are directly subject to market performance. Consequently, in an environment of lower inflation, these portfolios retain greater purchasing power, making a modest COLA potentially advantageous for those with substantial investment savings.
Lower inflation rates typically contribute to a stable environment for Social Security benefits. Questioning the common perception of inflation and COLA dependency, the Senior Citizens League’s findings reveal that years in which COLAs remained below 3% generally saw an increase in purchasing power for Social Security recipients. This is particularly relevant in the context of the Federal Reserve’s ongoing efforts to maintain an annual inflation target of around 2%. Even a projected 2.5% increase could potentially preserve and increase purchasing power for retirees, especially those with diversified income streams who benefit from the effects of lower inflation.
In summary, while the anticipated COLA announcement on October 10 may bring disappointing news regarding the amount, it is crucial for retirees to consider the broader implications of inflation and their varied income sources. For many, the interplay between Social Security benefits and personal investments might create a more favorable financial landscape than initially assumed. Understanding the complete retirement income picture and leveraging lesser-known strategies may lead to improved financial outcomes for seniors, ultimately allowing them to maintain financial confidence as they navigate their retirement years.