Millions of retired Americans collect monthly benefits from Social Security. And at this point, there's a big question seniors want an answer to: What will their 2025 Social Security cost-of-living adjustment (COLA) look like?
It's too soon to answer that. Recent estimates put 2025's Social Security COLA at 2.63%. But we won't have a clear number until inflation data for 2024's entire third quarter becomes available. That's not going to happen until October, which means Social Security recipients will have to sit tight for a couple more months and wait on that number.
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But regardless of whether 2025's Social Security COLA ends up being comparable to 2024's, smaller, or even larger, the end result is likely to be the same. There's a good chance seniors on Social Security will end up struggling financially no matter what.
COLAs have a long history of failing seniors
It's easy to see why a smaller COLA in 2025 would read like a disappointment. But let's remember that 2024's 3.2% COLA was fairly generous in the grand scheme of things. And even a raise that size left many seniors struggling to manage their bills.
A Motley Fool survey of older Americans found that 62% of respondents considered this year's 3.2% Social Security COLA insufficient. And 44% of those surveyed are considering going back to work because their Social Security benefits aren't paying them enough to get by.
These findings are consistent with those of the nonpartisan Senior Citizens League, which states that as of last year, Social Security recipients had lost 36% of their buying power since the 2000. And that largely boils down to insufficient COLAs through the years.
Why COLAs keep falling short
There's a reason Social Security COLAs don't do seniors as much good as they should. Those COLAs are calculated based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But that index isn't necessarily reflective of the costs Social Security beneficiaries incur.
Someone who works is likely to spend money to commute to a job. Retired seniors might spend less on gas and commuting due to not having jobs to go to.
People of working age might also have fewer healthcare expenses than Social Security recipients. Those collecting benefits, on the other hand, might spend more of their income on healthcare between Medicare premiums, copays, and deductibles.
All told, there's a disconnect between the expenses covered by the CPI-W and the expenses seniors tend to face the most. And because of this, Social Security recipients often end up unhappy with their COLAs -- even when they're larger than average.
For this reason, there's a good chance 2025's Social Security COLA won't be enough for retirees no matter what amount it comes to in the end. Seniors who don't have much or any income outside of Social Security should prepare for that now by cutting expenses as they're able to and looking to the gig economy for extra income. And those who aren't yet retired should do their best to save well for retirement so that insufficient COLAs don't create a world of ongoing financial stress.
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