Don’t assume that a less robust raise will wreck your finances in the new year.
For months on end, there’s been speculation about 2025’s Social Security COLA. But we’re pretty close to having an answer.
On October 10, the Social Security Administration (SSA) will be in a position to make next year’s COLA official. By then, the SSA will be able to incorporate inflation data from September to arrive at an exact number.
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For now, though, there are estimates of next year’s COLA to work with. And based on inflation readings to date, it’s looking like 2025’s Social Security raise will be somewhere in the vicinity of 2.5%.
Given that Social Security benefits rose by 3.2% at the start of 2024, a 2025 COLA in the ballpark of 2.5% might read like bad news initially. But here’s why it really isn’t.
There’s an upside seniors should know about
Social Security COLAs are calculated based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures changes in the cost of common goods and services for people in this category. We already have CPI-W data for the months of July and August. But it’s impossible to have a September reading before the end of September.
If inflation picks up substantially this month, then 2025’s Social Security COLA may end up coming in a bit higher than 2.5%. But that’s unlikely to happen. And it’s also not something anyone should want.
In fact, the reason a 2.5% Social Security COLA (or something in that ballpark) isn’t a bad thing is that it’s a sign that living costs aren’t rising as much. And if inflation continues to cool, retirees might get a lot more buying power out of a 2.5% COLA than expected.
Here’s another way to look at it. Social Security COLAs are supposed to match inflation in theory. If there’s a year when there’s no increase in the CPI-W from the following year (meaning, inflation stays flat), then Social Security benefits get a 0% COLA the following year.
But instead of fixating on a 0% raise in that situation, a better thing to do is recognize that costs also aren’t rising. So all told, things should even out.
The same concept is at play for 2025’s Social Security COLA. Next year’s raise may be smaller, but prices are moderating. Because of that, seniors may find that they’re able to cover their living costs with the raise they end up with.
It’s best to have outside income either way
There are some years when Social Security COLAs are substantial, and some years when they might come off as stingy. While smaller COLAs aren’t necessarily a terrible thing, it’s best to be in a situation where one COLA versus another doesn’t really make a difference. And the only way to do that is to have income outside of Social Security.
That could look like a lot of things. It could take the form of a decent-sized retirement account to tap, earnings from a part-time job, or rent collected from an income property. But it’s best to have some type of supplement to Social Security because regardless of COLAs, those benefits are not meant to replace workers’ incomes in full when they retire.
For the typical wage-earner, Social Security will replace 40% of what they used to make. That’s a pretty significant pay cut. So COLAs aside, it’s best to have additional income to fall back on in retirement to avoid financial stress.