The Social Security Administration will announce the 2025 cost-of-living adjustment (COLA) on Oct. 10, 2024. That's when we'll get the last key piece of information needed to calculate it. But even though we're missing some important data now, speculation already abounds about what it'll bring for beneficiaries.
Estimates have been climbing over the last few months, hinting that seniors might get a larger COLA than many would've guessed at the end of 2023. However, this comes with hidden drawbacks that could put increased strain on seniors' finances and Social Security itself.
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COLA estimates have risen 1.2% since the start of the year
The Senior Citizens League (TSCL) started the year by predicting a 1.4% Social Security COLA for 2025. This would've been the lowest increase since 2020. But it's already bumped up its estimate, first to 1.75% and most recently to 2.6% in April.
This has to do with how the government calculates COLAs. It looks at the difference in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year and the previous year. The CPI-W is a measure of how much a basket of common household goods costs over time. The 2023 third-quarter average was 3.2% higher than the 2022 third-quarter average, which is how we wound up with a 3.2% COLA this year.
In October, the Social Security Administration will repeat this process, comparing 2023 and 2024 data. The larger the increase between the averages, the larger the COLA will be. But though a high COLA means bigger checks for seniors, it also brings some pretty significant drawbacks.
Why a larger COLA could hurt seniors
There are two reasons a larger COLA isn't necessarily a plus for seniors.
Inflation dictates COLAs
The first is that large COLAs happen when inflation is high. So, while seniors might get larger checks, that money goes toward paying higher prices on everyday items rather than improving their quality of living.
Even worse, many argue the COLAs don't keep Social Security's buying power constant over time. TSCL reports that Social Security has lost 36% of its buying power since 2000. It also found that many senior households saw their expenses rise by more than $185 per month in 2023. However, the COLA for 2024 only added an extra $59 to the average benefit check. So your checks may buy less in 2025 than they do today, even with the COLA factored in.
High COLAs could exacerbate Social Security's funding crisis
A high COLA could cause Social Security to run out of money faster. Recent estimates indicate that the program has enough cash to pay out scheduled benefits through 2035. After this, it could face a shortfall if the government doesn't make changes to the program.
Larger COLAs would lead to money leaving the program's trust funds at a faster pace than it already is, and that could trigger benefit cuts of close to 20%. This could hurt seniors much more than a small COLA today.
So what should seniors do?
Both large and small COLAs have their drawbacks, which puts seniors in a difficult situation. But we won't know exactly what we're dealing with until October. About the only thing we can be sure of is that seniors will see some kind of benefit increase in 2025.
Those worried about their checks not going far enough may have to explore alternative retirement income sources to help them pay for what their benefits don't cover. And workers who have yet to apply for Social Security can maximize their benefits by optimizing their Social Security claiming age.
