In most years, retirees on Social Security receive a cost-of-living adjustment, or COLA. COLAs are built into the basic design of the program because they have to be. Inflation causes costs to rise, and seniors on fixed incomes must see their Social Security go up as well or they'd be able to buy less each year with their money.
While COLAs are common, something very unusual is likely to happen in 2025. It's something that hasn't occurred in over three decades and, at first glance, it may seem like a positive for seniors. But doing a deeper dive tells a different story.
Image source: Getty Images.
Here's what COLAs are on track to do in 2024
The 2025 COLA could make history for one simple reason. If the raise comes in as projected, it will be the first time in 31 years that retires have received a COLA that tops 2.7% for four or more years in a row. That means most seniors of this generation have never seen such a streak of big raises in a row.
Here's what the COLAs have looked like in recent years:
- 2024 raise: 3.2%.
- 2023 raise: 8.7%.
- 2022 raise: 5.9%.
Now, we don't yet know for sure what the 2025 raise is going to look like. We won't have a definitive answer on that until October. That's because the benefits increase is calculated using third-quarter data from a financial index called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The key months for this data are July, August, and September.
We have CPI-W data for the start of 2024, however, and it's provided enough information that experts can predict what the benefits increase will be next year. Based on the data to date, experts are projecting the COLA will be 2.7% in 2025.
If this prediction pans out, then this will be the first time since the 1990s that seniors have had raises of 2.7% or higher for four years running. The last time this happened was in 1988 to 1993, when retirees received the following raises:
- 1993: 3.0%
- 1992: 3.7%
- 1991: 5.4%
- 1990: 4.7%
- 1989: 4.0%
- 1988: 4.2%
Since that time, while seniors have seen big raises in some years, there has not been such a long run of big COLAs that add up to provide significantly larger Social Security benefits.
Is this once-in-a-generation phenomenon good for seniors?
A series of big raises may seem appealing, but COLAs aren't like traditional salary increases where you end up with more money because your company is growing or because you've improved your performance. The only reason COLAs are so big, and continue to be so big, is that we're seeing a pattern of high inflation that we also haven't seen in a generation.
Rising prices aren't good news. They give seniors less buying power with all their other money beyond Social Security. Runaway inflation also led the Federal Reserve to raise interest rates and has prevented the Fed from instituting rate cuts, which has made borrowing more expensive. Seniors suffer when their money loses value, perhaps more than most because they tend to be invested more conservatively and have fewer years to wait for a return to the status quo.
So while retirees are probably going to be the first in a generation to get so many big COLAs in a row, that's really nothing to celebrate. Instead, retirees should make sure they're watching their spending carefully so the high inflation in recent years doesn't derail their future.
