Millions of retired Americans today collect a monthly benefit from Social Security. For some people, that's supplemental income on top of a large IRA or 401(k). But for others, those benefits represent the majority of their monthly retirement income. And for people in the latter camp, annual Social Security cost-of-living adjustments, or COLAs, are extremely important.
The purpose of automatic Social Security COLAs is to help recipients maintain their buyer power as inflation drives the cost of living upward year after year. Without COLAs, seniors who get the bulk of their retirement income from Social Security would no doubt suffer.
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But when a given year's COLA isn't so generous, Social Security recipients can suffer. And unfortunately, based on recent inflation data, it's looking like 2025's Social Security COLA will be a lot smaller than 2024's. There is, however, a big silver lining to this situation that seniors should know about.
Why 2025's Social Security COLA is a mixed bag
In mid-July, the U.S. Bureau of Labor Statistics (BLS) released its monthly Consumer Price Index (CPI) reading. And that data included an update on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is the subset of the CPI that's used to calculate annual Social Security COLAs.
Based on July's 2.9% CPI-W reading, the nonpartisan Senior Citizens League updated its 2025 Social Security COLA projection to 2.57%. Compared to the 3.2% COLA Social Security recipients got at the start of 2024, a 2.57% raise reads like a big disappointment.
But there's another side to the story.
A smaller COLA is a big indication that inflation is easing. And that, in turns, means seniors on Social Security may be in a position to stretch their benefits further in the coming months, and also throughout 2025.
It's also important to recognize that the aforementioned 2.57% COLA projection is only an estimate. Social Security COLAs are calculated based on third quarter CPI-W data. As of this writing, the BLS hasn't even issued CPI data for August. And since we're barely into September, we clearly don't have data for the final month of the quarter, either.
Because of this, 2025's actual Social Security COLA could end up coming in higher or lower than 2.57%. And it's too soon to get too hung up on that number. Only once the Social Security Administration announces an official COLA in October can you start to make financial plans based on your projected monthly income for 2025.
Pad your savings now
If you're worried that 2025's Social Security COLA will leave you in the lurch financially, don't just wait for the new year to arrive to do something about it. Instead, assess your current spending and if there's any room to cut back. You may find that a few adjustments save you enough money to buy yourself some breathing room.
Remember, too, that the pace of inflation as of now is already below the 3.2% COLA Social Security beneficiaries are getting today. So if you find that you don't have to spend your entire Social Security check each month on essentials, bank the difference.
Finally, don't write off the idea of joining the gig economy. Unlike a part-time job with a schedule you have to commit to, gig work can be extremely flexible. And it can even be fun.
So if you're someone who's heavily reliant on Social Security and you're feeling uneasy about a potentially small COLA in 2025, start working a few hours a week to drum up extra income. You may even find that you like the job you take on because it helps you keep busy.
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