In October 2024, approximately 52 million retired workers received their Social Security checks, with most heavily relying on these payments to cover daily expenses. A Gallup poll revealed that 88% of seniors consider Social Security a critical source of income.
However, a survey by the Nationwide Retirement Institute highlighted that two-thirds of respondents were unaware that Social Security is protected against inflation. Thankfully, this is incorrect—annual cost-of-living adjustments (COLAs) ensure that payments keep pace with economic changes.
Social Security Checks Set to Adjust in January 2025
Inflation has been the top financial concern for Americans for three consecutive years, according to Gallup polls, and Social Security’s adjustments aim to address this concern. The Consumer Price Index (CPI) measures inflation based on price changes across eight major categories: food and beverages, housing, clothing, transportation, healthcare, recreation, education and communication, and other goods and services.
The CPI-W, a subset of the CPI, is specifically used by the Social Security Administration (SSA) to calculate annual COLAs. This calculation compares the third-quarter CPI-W of the current year (July to September) to the same period in the previous year. The resulting percentage increase determines the COLA for the upcoming year. Without these adjustments, the purchasing power of Social Security benefits would erode over time.
Impact of COLA on Social Security Benefits
Over the past decade, the CPI-W has risen by 32.6%, causing the cost of goods and services to increase by nearly a third since 2014. Fortunately, COLAs have ensured that Social Security benefits have increased at a similar rate.
For 2025, beneficiaries will see a 2.5% COLA increase. Notices detailing these updates will be sent in December via mail or through the My Social Security online portal. Below is a table illustrating how the 2.5% COLA will affect average benefits for different categories of beneficiaries:
| Beneficiary | Average Benefit (Before COLA) | Average Benefit (After COLA) | Additional Monthly Income |
|---|---|---|---|
| Retired Workers | $1,924 | $1,972 | $48 |
| Spouses | $910 | $933 | $23 |
| Survivors | $1,509 | $1,547 | $38 |
| Disabled Workers | $1,542 | $1,581 | $39 |
Inflation Trends and Lower COLAs: What They Mean
Although the 2.5% COLA in 2025 is the smallest increase since 2021, this decline reflects the significant drop in inflation from its 2022 peak. While smaller COLAs might appear discouraging, they indicate slower inflation, which reduces the rate at which Social Security benefits lose purchasing power.
As inflation decreases, beneficiaries experience less financial strain. Therefore, lower COLAs are not always negative; they can signify a healthier overall economy.
Addressing Rising Debt in Retirement
Despite COLAs, many retirees face financial challenges. According to the Employee Benefit Research Institute’s (EBRI) 2024 report, nearly half of 3,600 retirees surveyed admitted that their funds were insufficient for their needs. Additionally, 36% of retirees reported incurring unplanned expenses.
To address these challenges, retirees should consider diversifying their income sources, such as traditional pension plans and annuities:
Traditional Workplace Pension Plans
- These employer-sponsored retirement accounts provide a guaranteed monthly income based on salary history and years of employment.
- Often offered by public sector occupations, such as teachers, police officers, and firefighters.
Annuities
- These insurance products guarantee income over a set period or as a lump sum.
- There are three main types:
- Fixed Annuities: Provide a consistent payment over time.
- Variable Annuities: Payments vary based on investment performance.
- Indexed Annuities: Payments are tied to a stock market index.
- Annuities are regulated by state insurance commissioners, ensuring security for retirees.
FAQs
What is the purpose of COLAs in Social Security?
COLAs ensure that Social Security benefits keep pace with inflation, preserving the purchasing power of retirees and other beneficiaries.
How is the COLA for Social Security calculated?
The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of the current year compared to the same period in the prior year.
When will the 2025 COLA adjustments take effect?
The adjustments will begin in January 2025, with beneficiaries notified of their new benefit amounts in December 2024.
