Each October, Social Security recipients eagerly await the news of their upcoming cost-of-living adjustment, or COLA. The purpose of COLAs is to help seniors on Social Security maintain their buying power as living costs rise.
Think about this way. Imagine you started off collecting $1,500 a month in Social Security in the year 2014. Now, think about the way living costs have gone up over the past decade. Had your monthly Social Security benefit held steady at $1,500, you'd have no doubt struggled to keep up with your increasing costs.
Image source: Getty Images.
The reason Social Security COLAs are announced in October each year is that they're specifically based on third-quarter inflation data. And that data is taken from the Consumer Price Index for Urban Wage Earners and Clerical Workers.
Since we haven't reached the third of quarter of 2024, it's too soon to say what 2025's Social Security COLA will amount to. But initial projections are pointing to a COLA of under 2%. Compare that to the 3.2% COLA seniors on Social Security got at the start of the current year, and that number may not look great at first. But a smaller COLA may not be such a bad thing after all.
When you lose out on a bigger raise but get more buying power regardless
Whether you're on Social Security or not, it's natural to want to see your monthly paycheck grow. But if your paycheck grows minimally so that it can't keep up with inflation, it won't do you much good.
That's the problem Social Security recipients have run into for many years. As such, if you're someone who's collecting benefits, rather than hope for a large COLA in 2025 (or any future year, for that matter), what you may want to do instead is hope that inflation cools. And the whole reason next year's COLA projections are coming in the way they are is that inflation has, indeed, been cooling.
So let's say that next year's Social Security COLA isn't that high and only raises your monthly benefit by $40. That might seem like a huge blow. But what if the cost of things like groceries, gas, and utilities shrinks by $60 a month next year? In that scenario, you're not necessarily doomed financially, because even with a smaller COLA, you're saving money by virtue of not having to spend as much of it.
It's best not to have to bank on COLAs in the first place
If 2025's Social Security COLA ends up at under 2%, many seniors will no doubt be disappointed. But they shouldn't necessarily be.
However, if you're still working and aren't yet on Social Security, you should know that it's really not ideal to be in a situation where you're counting on a certain COLA to make ends meet. A much better scenario is to have retirement savings to supplement your Social Security income so that COLAs matter a lot less.
So if you're still in a position to make contributions to an IRA or 401(k) plan, do so. That extra money might make it so that you don't have to sit around anxiously awaiting a COLA announcement each October as a retiree.
