Social Security 2025 – The latest COLA update may not be what retirees were expecting

Retirees might be in for a bit of a shock: despite inflation still running hot in March, Social Security benefits may receive a smaller cost-of-living adjustment (COLA) next year.

After inflation surged at the end of the pandemic, retirees saw an unprecedented 8.7% COLA boost in 2023—the biggest in four decades. But despite this historic raise, the 2023 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) revealed that many retirees still faced financial struggles throughout the year. It seems that even with a bigger check, some financial challenges can be a bit too inflationary to overcome.

COLA Blues: Smaller Adjustments and Bigger Concerns for Retirees

Adding to the frustration, Social Security benefits saw only a 3.2% COLA this year, leaving many retirees disappointed. In fact, a survey by The Senior Citizens League (TSCL), a nonprofit group advocating for seniors, found that 71% of retirees reported that household costs have gone up more than 3.2%. Even worse, 53% said they’ve already dipped into their emergency savings.

Given this, many retirees are likely hoping for (and maybe even expecting) a bigger benefit boost next year. Sadly, the latest projection from TSCL suggests that Social Security’s COLA will shrink once again in 2025. It looks like the inflation party is far from over, and retirees are left holding the check.

Why COLAs Might Be Falling Short of Inflation

Social Security’s cost-of-living adjustments (COLAs) are calculated based on the average inflation rate from the third quarter—the months of July, August, and September. Interestingly, the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) is used to calculate these adjustments, even though it’s a smaller subset of the more commonly known CPI-U. It’s a bit like using a side dish to figure out how much to pay for the whole meal.

The calculation for COLAs is pretty simple: the third-quarter CPI-W from the current year is divided by the third-quarter CPI-W from the previous year. The result? The percent increase, if there is one, becomes the COLA for the following year. For example, the CPI-W went up 3.2% in the third quarter of 2023, so Social Security benefits got a 3.2% bump in 2024.

Inflation Still Knocking on the Door

While inflation has slowed down since hitting its peak in June 2022, a worrying trend has started to show up lately. Instead of continuing to ease off, consumer prices are starting to pick up speed again. The CPI-W rose by 2.9% in January, 3.1% in February, and a not-so-pleasant 3.5% in March, marking the highest jump in seven months. Looks like inflation is still warming up, and retirees may have to brace for a slightly smaller COLA in 2025.

The March CPI-W reading of 3.5% is especially concerning because it surpassed the 3.2% COLA that was applied to Social Security benefits this year. This means that benefits lost some purchasing power last month, as they grew more slowly than the rise in consumer prices. If this trend continues, beneficiaries could find their financial situation tightening as the year goes on.

To put it in perspective, the average retired worker’s benefit was $1,910.79 per month in February 2024. A 2.6% increase would bump that to $1,960.47, giving the average retiree about $49.68 more each month—assuming that 2025’s COLA lands at 2.6%. It might not be a huge windfall, but every little bit counts—especially when it feels like prices are trying to make a run for the money.

Planning for a COLA Bump, Yet Staying Cautious

Of course, that number is just a ballpark figure. The Social Security Administration can’t lock in the official COLA until the third-quarter inflation data is out. That usually arrives around mid-October. In the meantime, retired workers should cross their fingers but brace for impact. Smart budgeting and careful spending are always a good idea—just in case the COLA doesn’t provide the extra cushion they’re hoping for. After all, it’s better to be prepared for a rainy day than caught in a financial downpour.