Retirees are on track for a solid raise in 2025.
If you’re retired, planning ahead is important for your financial security — especially if you’re living on a fixed income and can’t simply earn more cash if you need it.
That’s why it’s a good idea to keep tabs on current data related to your upcoming Social Security cost-of-living adjustment, or COLA. These adjustments happen most years to increase benefits, which means you may have more money to spend without tapping into your savings.
So, what do you need to know about the COLA that you’ll see next year? Here are three key facts you should be aware of today so you can be better prepared for the future.
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1. Recent estimates suggest the 2025 COLA could be higher than expected
The first piece of news regarding your COLA may make you happy because you’re likely to get a bigger cost of living adjustment than experts anticipated earlier this year.
In January, The Senior Citizens League (TSCL) estimated the 2025 COLA would come in at 1.4%, substantially lower than what beneficiaries received the last three years.
But TSCL revised that estimate up in both February and March, and its latest projection calls for a COLA of about 2.6% next year. This means your benefits bump may be somewhat closer to the substantial raises seen in recent years.
2. Nothing is set in stone until the third quarter is over
Unfortunately, the next thing to know is there’s no guarantee you’ll get that projected 2.6% raise or anything close to it.
You may end up with more or less, and the final number won’t be known until October. That’s because your COLA is based on the year-over-year change to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of each year.
TSCL and other experts are making projections for what future benefits will be based on current CPI-W numbers and inflation forecasts, but no one can say with certainty what’s going to happen to the price of consumer goods in the coming months.
3. The COLA may not keep pace with the real inflation seniors are experiencing
Finally, the last thing to know is your COLA, whether it’s 2.6%, 1.4%, or something else entirely, may not be enough to maintain your current living standard.
That’s because CPI-W, the index used to determine the COLA, is designed to track the consumption patterns of working professionals. But their spending don’t really match that of retirees who tend to see a greater percentage of their income go to expenses like healthcare.
As a result of this flaw in the formula, TSCL estimates retirees have lost 36% of their buying power since 2000 and would need an additional $516.70 more each month just to maintain the living standard they had in the year 2000. The record-high inflation in the post-pandemic years has only accelerated this trend.
Although there have been proposals in the past to swap the CPI-W in the COLA formula to the CPI-E, a price index for Americans aged 62 and older, this change isn’t likely to happen anytime soon. So, retirees can expect to keep losing ground as long as the current formula fails to fully capture their actual spending patterns.
Understanding these three key facts can help you better prepare for what your finances will look like next year. Even a big COLA in 2025 can fall short of what you’re experiencing with rising prices, so you should budget carefully.