Will 2025's Social Security cost-of-living adjustment (COLA) be a generous one? That's looking less and less likely by the day.
The good news is that the current 2.63% COLA estimate for 2025 is higher than previous ones from earlier in the year. The bad news is that next year's COLA is shaping up to be considerably smaller than 2024's.
Given that this year's COLA was a big step down from 2023's, it doesn't paint the most comforting picture for Social Security recipients. But that doesn't mean all is lost, either.
Image source: Getty Images.
We're getting closer to having an answer
Social Security COLAs are based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When there's an increase in the CPI-W compared to the previous year, Social Security benefits get a boost, the amount of which depends on the pace of rising inflation.
When there's no increase in the CPI-W from one year to the next, Social Security benefits remain flat. Thankfully, they can't decrease from year to another.
At this point, we don't have CPI-W numbers for July, which is the first month whose data is factored into next year's COLA. But economic indicators are pointing to cooling inflation, which makes a larger 2025 COLA less likely.
Of course, it can be argued that a smaller Social Security COLA isn't a terrible thing in reality. After all, it's an indication of cooling inflation, which translates to more relief for senior consumers (and consumers in general) in the context of essential, everyday purchases.
But Social Security recipients are unlikely to see a smaller COLA as a good thing. And if that number keeps edging downward, many seniors will no doubt find themselves stressed.
How to make up for a smaller COLA
There's nothing seniors can do to change how 2025's Social Security COLA shakes out. But if you're worried about a stingy raise, there are steps you can take now to make up for one.
First, see if there's a way to trim some spending. That could mean giving up a car if you're in a walkable city and your health makes public transportation feasible. It's likely a far more affordable option.
Next, consider gig work to pad your income. You don't have to do it permanently -- just long enough to build yourself a savings cushion so you're not so reliant on Social Security to cover your bills.
Finally, make sure you're being savvy about healthcare, since it's probably one of your largest retirement expenses. Review your prescriptions with your providers regularly to make sure there aren't lower-cost alternatives. Keep up with your preventive care (some of which Medicare enrollees get for free) to stave off medical issues that may end up being costly to treat. And gear up to evaluate your different plan choices during Medicare's upcoming fall open enrollment, which isn't so far away at this point.
We won't get official word of 2025's Social Security COLA until October. But it's important to be realistic about what that number might look like. Rather than stress over a smaller raise, take steps to better your financial situation so that a less generous boost in 2025 doesn't hurt you.
