At the start of 2024, seniors on Social Security saw their monthly benefits rise 3.2% And while that cost-of-living adjustment, or COLA, paled in comparison to the enormous 8.7% raise recipients got the year before, it was still a fairly generous boost.
Next year, however, Social Security beneficiaries may be looking at a smaller raise. And at first, that might seem like a bad thing. But when we dig deeper, it's easy to find the economic silver lining.
Image source: Getty Images.
How Social Security COLAs are calculated
Social Security COLAs are calculated based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers. When that index rises from one year to the next, Social Security benefits tend to follow suit.
The reason Social Security recipients got such a huge raise in 2023 was that inflation soared in 2022. Because inflation cooled off in 2023, seniors' 2024 COLA was much smaller.
Meanwhile, recent projections from the nonpartisan Senior Citizens League put 2025's Social Security COLA at 2.6%. Now that number can obviously wiggle quite a bit between now and the third quarter of the year. But still, so far, it's looking like next year's COLA won't be quite as high as this year's.
The reason that's not such a terrible thing, though, is that a smaller COLA is an indication that inflation is easing. And so while seniors on Social Security may not see their benefits rise to a large degree, they might also enjoy some relief in 2025 in the form of reduced spending on essentials.
Set yourself up to not have to worry about Social Security COLAs
Seniors who are very reliant on Social Security for retirement income tend to eagerly await news of an official COLA year after year. But frankly, that's a pretty lousy position to be in.
Think about it -- if your financial situation is such that it matters tremendously to you whether you get a 2.6% boost to your Social Security benefits versus a 3.2% boost, you're probably living a pretty cash-strapped existence. And after a lifetime of hard work, you deserve better.
So rather than put yourself in a position where Social Security becomes your main (or, worse yet, sole) source of retirement income, save on your own during your working years. If you give yourself a lengthy savings window, small monthly contributions over time can add up in a positive way.
For example, let's say you set aside $300 a month for retirement over a 40-year period at an average annual 8% return, which is a notch below the stock market's average. At that point, you could end up with a nest egg worth about $933,000. With savings like that, you probably don't have to sweat your Social Security COLA so much.
It's too soon to know what next year's Social Security COLA will amount to. But if you can help it, try to put yourself in a position where COLA announcements aren't so monumental in your life. Instead, aim to make your savings your primary source of retirement income, and use Social Security as a supplement that makes your bills easier to manage.
