Many seniors inevitably wind up in a position where they're forced to largely live on Social Security. That's not ideal, though, because those benefits will only replace about 40% of an average earner's pre-retirement wages. And seniors commonly need a lot more income than that to live comfortably.
But still, that doesn't change the fact that many retirees today are extremely reliant on Social Security. And as such, they're reliant on generous cost-of-living adjustments, or COLAs, so that their benefits get enough of a boost each year to keep pace with inflation.
In 2023, Social Security recipients received a whopping 8.7% COLA -- the largest to arrive in decades -- in response to the rampant inflation that battered consumers in 2022. This year's COLA was notably smaller at 3.2%, but significant nonetheless.
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But recently, the non-partisan Senior Citizens League put out an estimate for 2025's Social Security COLA. And it's a number that may not sit so well with seniors.
Next year's COLA could come in at under 2%
Let's get one thing out of the way. It's soon to really produce an accurate estimate of next year's Social Security COLA because that data is determined based on third quarter inflation data. Since we're still in the midst of the first quarter of the year, any projections that come out at this point are really just educated guesses.
That said, based on January's reading of the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, the Senior Citizens League is estimating 2025's Social Security COLA at 1.75%. However, the group itself says that next year's final COLA is likely to be different.
Either way, though, it is likely that seniors on Social Security will be in line for a smaller COLA in 2025 than in 2024. But that's not necessarily a bad thing.
Because COLAs are pegged to inflation, a smaller COLA is indicative of more moderate consumer costs. To put it another way, seniors on Social Security might see their benefits go up a bit less next year. But if they're also not struggling to pay for food and gas and other essentials because prices have cooled, then that alone might serve as a greater source of financial relief.
It's best to have income outside of Social Security
The fact that a larger or smaller Social Security COLA could make or break some retirees' finances underscores the importance of having income outside of those benefits. Unfortunately, many retirees today have limited options for boosting their income, though those in good enough shape to work could look to the gig economy for additional earnings.
However, anyone who's still working full-time has a prime opportunity to save more for retirement so they can become less reliant on Social Security later in life. Putting $370 a month into a retirement plan over a 30-year period could result in a balance of a little over $500,000, assuming an average annual 8% return on invested savings, which is a bit below the stock market's average.
Ultimately, Social Security beneficiaries will have to sit tight until October to hear what their 2025 COLA will amount to. But they also shouldn't be shocked if that number ends up being lower than what it was in 2024.
