Social Security's COLA Is Great, but It Could Be Greater

As you approach and enter retirement, you'll find yourself much more interested in Social Security -- a topic that perhaps used to seem dreadfully dull. Social Security provides vital income for retirees -- indeed, it keeps more than 22 million people above the poverty line, per the Center for Budget and Policy Priorities.

But it doesn't provide quite as much income as many people might expect. As of August, the average monthly benefit for retirees was just $1,920, or about $23,000 for the year. That's not a lot, but here's some good news: Social Security benefits are increased in most years, via cost-of-living adjustments ( COLAs ).

Image source: Getty Images.

The COLA for 2025 is expected to be around 2.5% , per the Senior Citizens League. Let's put that into perspective, because there are some good and some not-so-good things about it.

COLA basics

First, know that while COLAs occur in most years, boosting retirees' income to help keep up with inflation , there are some low-inflation years with no COLAs. But those are relatively rare. Here are some recent COLAS:

Data source: Social Security Administration.

You see that they can get quite high or be quite low. The average COLA over the past two decades or so has been about 2.6%.

Reasons to be happy about the 2025 Social Security COLA

So. what's so good about a 2.5% increase or even a 3.5% one, both of which might seem puny? Well, retirees should celebrate that Social Security benefits increase over time -- period. Some sources of income in retirement do not, or increase more slowly.

Interest payments from savings accounts, for example, can go up and down over time, and they spent a long time being extremely low in the last decade or so. A fixed-rate annuity will deliver a fixed income stream -- unless you're able to pay more for some annual increases. A pension may be fixed as well.

Any fixed income stream will see its purchasing power shrink dramatically over a long period. For example, your retirement may last 30 years. If inflation averages around 3% annually, you could see your purchasing power cut roughly in half over 25 years -- so that in your last years, something that cost you, say, $1,000 in 2024 may cost you $2,000 in 2049.

If it makes sense for you -- and it does for most people -- aim to delay starting to collect your Social Security benefits until age 70 , because that can maximize your total benefits. That can also help maximize your COLAs. For example, imagine that by delaying, you increase your benefit check from around $2,000 to $2,500. A 2.5% increase would be $50 for a $2,000 benefit, but $62.50 for a $2,500 one. Your next COLAs would result in bigger increases, as well -- for the rest of your life.

Reasons to not be so happy about the 2025 Social Security COLA

All that should sound pretty good. So what's not so great about Social Security's COLAs? Well, they're based on inflation rates as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- an index tracking changes over time in the prices of a basket of popular goods and services. Its eight main categories, as detailed by the U.S. Bureau of Labor Statistics, are:

• Food and beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
• Housing (rent of primary residence, owners' equivalent rent, utilities, bedroom furniture)
• Apparel (men's shirts and sweaters, women's dresses, baby clothes, shoes, jewelry)
• Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
• Medical care (prescription drugs, medical equipment and supplies, physicians' services, eyeglasses and eye care, hospital services)
• Recreation (televisions, toys, pets and pet products, sports equipment, park and museum admissions)
• Education and communication (college tuition, postage, telephone services, computer software and accessories)
• Other goods and services (tobacco and smoking products, haircuts and other personal services, funeral expenses)

That's good, but the COLAs could better serve retirees if they were based on the so-called CPI-E not the CPI-W above . That's because the CPI-W is meant to reflect the expenses of workers, while the CPI-E is meant to better reflect the spending of those over age 61 . Thus, for example, it weights medical care -- a category that has experienced higher-than-average cost increases -- more heavily.

So as you look forward to your eventual Social Security benefits, rejoice that you'll be getting fairly regular COLAs. And go ahead and hope that in the years to come, those COLAs get improved by tying them to a more appropriate measure of inflation.

Finally, know that while the latest estimate of the COLA for 2025 is 2.5% (per the Senior Citizens League), it's just an estimate. The actual number will be revealed on Oct. 10 on the Social Security Administration's website .

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