Social Security recipients are eager for a big raise in the new year. Will it disappoint?
Many retired Americans get the bulk of their monthly income from Social Security. For people in this boat, annual cost-of-living adjustments, or COLAs, are extremely important.
The purpose of Social Security COLAs is to help beneficiaries maintain their buying power as inflation drives the cost of living upward. Retirees with nice amounts of savings don’t have to worry about COLAs as much as those who are reliant on Social Security for the majority of their basic expenses. But even people who have outside income appreciate it when their Social Security benefits get a nice lift from one year to the next.
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Because inflation has been cooling pretty steadily this year, there’s a good chance that 2025’s Social Security COLA won’t be as high as 2024’s 3.2% raise. But before you get too upset over that, realize that based on current estimates, next year’s COLA is fairly in line with the average Social Security raise over the past 10 years.
A number that makes sense
Initial estimates are calling for a 2.57% Social Security COLA in 2025. While that’s not as high as recent COLAs, there’s a reason for that.
Inflation began picking up steam in 2021 as the U.S. economy staged its recovery from the economic impact of the pandemic. But that led to a period of drastically rising living costs.
Inflation has thankfully cooled nicely in the course of 2024, so much so that the Federal Reserve has signaled that it’s looking to start cutting interest rates in the near future. But a slower pace of inflation also typically translates to a smaller Social Security COLA, which is why next year’s projected raise is notably smaller than 2024’s.
However, because COLAs are pegged to inflation, what Social Security recipients lose in the form of a smaller raise, they commonly gain in the form of more moderate rises in living costs. So all told, things should largely even out.
You should also know that over the past 10 years, the average Social Security COLA is 2.75%. This account for 2023’s massive 8.7% COLA, but it also accounts for a 0% COLA in 2016 and a meager 0.3% COLA the year after. So in context, 2025’s projected 2.57% isn’t so far off from that average.
We don’t have all of the information yet
Social Security COLAs are calculated based on third quarter changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Since the third quarter of 2024 isn’t over yet, we don’t have a complete data set for the CPI-W. As such, that 2.57% COLA projection is merely that — a guess, albeit an educated one.
But even if Social Security’s official 2025 COLA ends up coming in lower than 2.57%, there’s a good chance it still won’t be extremely far off of the average over the past decade. And it’s apt to be far better than 0%. So while it’s important to gear up for a potentially smaller COLA, it’s also important to look at the big picture once that announcement comes through on October 10.