Social Security recipients, including the roughly 1.5 million living in Arizona, will receive a 2.5% cost-of-living adjustment, or COLA, starting in 2025, raising the average monthly benefit by around $48. The average payment currently stands near $1,920.
The Social Security Administration announced the new inflation increase on Oct. 10 . COLAs, which are uncommon outside of Social Security payments, help recipients keep up with rising prices for food, shelter, transportation and much more. Here’s how the new numbers might affect your finances:
What are COLAs?
They are annual benefit increases designed to “offset the corrosive effects of inflation on fixed income,” according to the Social Security Administration. The increase also applies to disabled and largely indigent retirees receiving SSI or Supplemental Security Income. Some 68 million Americans will receive COLAs on their retirement benefits and 7.5 million will get them on SSI benefits. Some people receive both, so the total number of affected individuals totals 72.5 million, the Social Security Administration said.
Are COLAs automatic?
Yes. Before 1972, Congress needed to approve increases, which it did from time to time. Since then, COLAs have been automatic, though there are occasional years when no increases are granted, reflecting little or no inflation during those periods.
How are COLAs calculated?
The COLAs for Social Security reflect changes in an inflation gauge known as CPI-W, from the third quarter of one year to the third quarter of the next. Based on the latest release by the Bureau of Labor Statistics, CPI-W rose by 2.5% from July through September of 2023 compared with July through September of this year.
The official name for CPI-W is the Consumer Price Index for Urban Wage Earners and Clerical Workers. It’s slightly different from another widely followed inflation gauge, CPI-U or the Consumer Price Index for All Urban Consumers.
How has inflation changed lately?
Many Americans are having trouble making ends meet, but inflation has slowed over the past couple of years, so COLAs also have tapered off. The COLA announced in 2023 and payable this year was 3.2%, following a steep 8.7% rise in 2022 — the largest increase since 1981. Inflation measures the change in prices, not whether they are cheap or expensive in the eye of the beholder.
And while 2.5% might look paltry, “It’s really right in line with the past 20 years,” said Lisa Featherngill, national director of wealth planning at Comerica Wealth Management.
Why are eggs so expensive again? What to know before grocery shopping in Arizona
What percentage of retirees depend mainly on Social Security?
It’s the primary source of income for 40% of older Americans, said Jo Ann Jenkins, AARP’s CEO. COLAs are vitally important for these people, ensuring that they "have an inflation-protected source of income in retirement," she said.
What else can people do to make ends meet?
Featherngill considers this a good time to take a close look at your cash inflows and outflows, especially before holiday shopping pressures arise. What expenses can you cut or shop around for, she asked, citing cable television or auto or home insurance as possibilities. Budgeting programs such as those available on Quicken or Credit Karma can help, she added.
Are you worried about retiring? You're not alone. Here's why so many don't feel ready
Do investments come with COLAs?
Generally, no, though a few feature inflation protection. TIPS, or Treasury Inflation Protected Securities, bondlike investments issued by the federal government, are one obvious example. Some other assets, such as broadly diversified stock market portfolios, also have outperformed inflation over many decades, though not with anything resembling the assurance or predictability of Social Security COLAs. In addition, gold and some other commodities are considered to be inflation hedges.
Do COLAs worsen Social Security’s already precarious funding status?
Yes, they do, as these are significant new expenses for the program. Social Security is expected to hit a wall in 2033, at which time benefits could be cut to 79 cents on the dollar compared with today’s level. Congress can shore up the program by cutting benefits, raising taxes or choosing a combination of the two, but so far politicians haven’t shown any resolve to make these hard decisions.
Both presidential contenders, Donald Trump and Kamala Harris, have pledged to protect Social Security, but neither has put forth a meaningful plan to do so, said the Committee for a Responsible Federal Budget. In fact, Trump's proposal to end partial taxation of Social Security benefits would worsen the program's finances , the group said.
The Social Security trust fund is projected to be depleted by 2033 , at which time benefits would be slashed by 21% without any reforms. The committee estimates this would result in a $16,500cut in annual benefits for a typical two-income couple retiring at that time.
Reach the writer at russ.wiles@arizonarepublic.com.
This article originally appeared on Arizona Republic: What the 2025 Social Security inflation adjustment means for your benefits
Local News
